Why The Final Payday Lending Rules Are Far From The Last Word

Last week, after five years of debates, discussions, arguments and waiting, the Consumer Financial Protection Bureau’s (CFPB) final rules for payday lending dropped.

As one might expect after such a long and intense build-up, the reactions were also fairly intense from both sides.

Perhaps less expected is where opinions came together, because outside the standard reaction camps, a consensus is building.

No one will argue the point that regulation is not necessary or that abuses don’t happen.  But whether what is on offer from the CFPB is the set of regulations a multibillion-dollar-a-year industry that serves tens of millions of Americans who seem to desperately need its services are the right set of regulations is where there are differences of opinion.

The opinions get more nuanced, even in places where one might not expect to see them.  Reading through the collective reactions of the financial services ecosystem over the last seven days makes one thing very clear:

The CFPB may have called its payday lending regulations a final draft, but this process is far from over.

All the Reactions Expected (from the People You Expected to Have Them)

Consumer advocates and democratic legislators and those who have generally been largely supportive of the CFPB and it efforts were pretty happy with the agency’s ruling last week.

“Today’s rule release was years in the making, and it wouldn’t have been possible without the tireless effort of community and faith leaders, consumer and civil rights advocates and countless people across the country who organized and worked hard to make their voices heard,” said Michael Calhoun, president of the Center for Responsible Lending.

“Too many Americans end up sinking deep into a quicksand of debt when they take out expensive high-cost loans,” said Suzanne Martindale, senior attorney for Consumers Union, who praised the rules’ attempts to get consumers off what she referred to as “the debt treadmill.”

“The CFPB took a strong step today to protect consumers from harmful, single-payment payday and auto title loans,” said Nick Bourke, director of The Pew Charitable Trusts’ consumer finance project.

“The Consumer Financial Protection Bureau’s rule will crack down on shady payday lenders that saddle borrowers with triple-digit interest rates and cost Ohioans over $500 million a year in fees alone,” said U.S. Senator Sherrod Brown. “Payday lenders have exploited loophole after loophole to trap working people in debt, and this rule will help put an end to their abusive practices.”

On the other side of the issue, however, industry representatives were far less excited and genuinely concerned about the unintended casualties of the “consumer protection” legislation.

“Millions of American consumers use small-dollar loans to manage budget shortfalls or unexpected expenses,” said Dennis Shaul, chief executive of the Community Financial Services Association of America. “The CFPB’s misguided rule will only serve to cut off their access to vital credit when they need it the most.

“As difficult as it may be for some people to admit, payday lenders provide a valuable service for which countless consumers have demonstrated they are both willing and able to pay,” noted Norbert Michel, Heritage Foundation Research Fellow in Financial Regulations.

“The final rule published today will devastate an industry that serves nearly 30 million American customers each year,” noted Edward D’Alessio, executive director of the Financial Service Centers of America.

“Most concerning, this rule completely disregards the concerns and needs of actual borrowers, who value this credit option and told the CFPB as much in the record 1.4 million comments submitted. Rather, it is the predetermined outcome of a contrived and deeply flawed rule-making process, dictated by personal biases and politics and the outsized influence of ideologues and activists, to eviscerate a regulated industry and disenfranchise millions of American consumers,” noted Jamie Fulmer, senior vice president of Public Affairs at Advance America.

Against those divergent opinions, a consensus began to emerge.

Somewhat Unexpected Agreement

It is not at all surprising that The Wall Street Journal and Forbes’ editorial boards were sharply critical of the new regulations. Both noted the regulations seem to have been written with the express purpose of banning payday lending without actually banning it — and that such a move would push consumers into some very shady corners of the market.

Even more surprising is that the editorial boards and writers at The Washington Post and The Boston Globe agree with them, given their historical pro-CFPB stance. But both made similar arguments: Consumers need payday loans; for many, it is their only option. Driving payday lenders from the market without an alternative puts them at risk.

Advance America’s Fulmer also explained that contrary to popular news reporting on the subject, the short-term lending industry is not hostile to regulation or more legislation; in fact, regulation to clarify the segment would be helpful and welcome in a marketplace where rules swing so widely from jurisdiction to jurisdiction. Fulmer said that most players don’t even object to more competition from banks and applaud regulatory clarity that would allow them to compete in the market.

But, he said, competition is only competition if both sides compete on an equal playing field — instead of a regulator who is arbitrarily picking a winner.

“Banks and credit unions should be looking for ways to serve these customers, who are always better served when there is competition in the marketplace; but that doesn’t mean they should get special exemptions or carve-outs. There should be vying for the consumer’s business under the same rules and regulations that non-depository providers operate under,” Fulmer noted in an interview with PYMNTS.

Or, as Pew Charitable Trust pointed out, operating under clear and knowable regulations for all.

The Long Walk Ahead

PYMNTS caught up with Pew’s Alex Horowitz, who noted that the non-profit supports the CFPB rules’ attempt to create a “well-balanced” solution that reduces consumer harm and allows an “access path for small-dollar credit.”

But, he said, there is a lot of path-clearing that still has to happen to make those rules work meaningfully for consumers.

“Banks haven’t known what the rules are because the entire market has been in a state of suspended animation for five or six years now, waiting for these final rules,” Horowitz remarked, adding that no bank or credit union wants to develop a new small loan program until they know what the rules are.

The CFPB final payday lending rule is an important step, Horowitz said, but there are many more steps to come.

“Banks need clear guidelines from a host of players. There’s the OCC for national banks; for small state there is the FDIC; medium banks have the Fed and there is NCUA for credit unions. Those guidelines need to be clear enough to help them develop a small loan program.”

Horowitz noted that the CFPB carve-out specifically refers to very small banks that do very small loan volumes for consumers to get much better products than the payday loans offered today by larger banks, simply because they have the most customers.

There are reasons to be hopeful that will happen with better regulatory guidance. According to Horowitz, banks’ lower overhead and capital costs mean that under the right conditions, they can offer short-term lending customers a better deal on a small-dollar loan but still make the loan profitable.

Horowitz pointed out that comments — submitted by banks to the CFPB last year, even from large banks — sought streamlined guidelines that would let them use automation to offer small loans. That is important, he said, because if there is any regulatory uncertainy, it becomes very difficult to underwrite or originate small loans. If a bank has to manually underwrite lots of little loans for short periods of time, it chews up any profit they might make in offering a more reasonably priced alternative to payday lenders.

Banks, he said, have no reason to enter the segment if they can’t make money; they can’t make money if they can’t automate and they can’t automate without specific regulatory guidance.

Unfortunately, they might have to wait.

The Office of the Comptroller of the Currency (OCC) has offered some preliminary guidance to roll back more restrictive rules from 2013 but has only hinted that it might offer more specific rules in the future.

That process, however, will likely be on hold until it has a permanent head; Keith Noreika has made it past the committee and is heading for a full Senate confirmation. He is expected to be confirmed, but Washington is a wild place these days. The Federal Deposit Insurance Corporation’s (FDIC) chairman’s term will come to an end next month, and it’s likely no new guidance will come from there until his permanent replacement is in office. So far, the Federal Reserve and the National Credit Union Administration (NCUA) have said little on the subject, and since neither has been mentioned much in the reporting on this topic, it’s not entirely clear they know they are supposed to respond.

Plus, Senate Republicans may attempt to use the Community Reinvestment Act (CRA) to block the rule change (though that is seen as unlikely, given where it is on the calendar and how polarizing the issue is), industry lawsuits may prevent its implementation and the CFPB will get a new director appointed by a Republican President in July of 2018 no matter what else happens.

Alex Horowitz pointed out that banks, even when they have clear regulatory guidance, will still need to build the products.

So, stay tuned. A lot of regulators, legislators, judges, consumer advocates, lobbyists and lawyers have an awful lot of arguing left to do.

It might have been the CFPB’s final rule, but it will be far from the final word.