Revenues for the $6 billion payday loan industry will shrivel under a new US rule restricting lenders’ ability to profit from high-interest, short-term loans, and much of the business could move to small banks, according to the country’s consumer financial watchdog.
The Consumer Financial Protection Bureau (CFPB) released a regulation requiring lenders to determine if borrowers can repay their debts and capping the number of loans lenders can make to a borrower.
The long-anticipated rule still must survive two major challenges before becoming effective in 2019. Republican lawmakers, who often say CFPB regulations are too onerous, want to nullify it in Congress, and the industry has already threatened lawsuits.
Mostly low-income earners use what are known as payday loans — small-dollar advances typically repaid on the borrower’s next payday — for emergency expenses. The lenders generally do not evaluate credit reports for loan eligibility.
Under the new rule, the industry’s revenue will plummet by two-thirds, the CFPB estimated. The current business model relies on borrowers needing to refinance or roll over existing loans. They pay fees and additional interest that increase lenders’ profits, CFPB Director Richard Cordray said on a call with reporters.
“Lenders actually prefer customers who will re-borrow repeatedly,” he said.
People trapped in that debt cycle can end up paying the equivalent of 300 per cent interest, the bureau found in a study it conducted during five years of writing the rule.
The rule will devastate an industry serving nearly 30 million customers annually, said Ed D’Alessio, Executive Director of the Financial Service Centres of America, an industry trade group.
“Taking away their access to this line of credit means many more Americans will be left with no choice but to turn to the unregulated loan industry, overseas and elsewhere, while others will simply bounce cheques and suffer under the burden of greater debt,” he said.
The agency narrowed the final version of the regulation to focus on short-term borrowings, instead of also including longer-term and instalment debt. It exempted many community banks and credit unions from having to ensure borrowers can repay loans, as well. — Reuters
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