If there is one industry that has mastered the art of the loophole, it is high-cost loans. When faced with unwanted regulation, lenders have a lot of practice finding an opening that allows them to charge triple-digit interest to their clients. As we have reported, have been playing a giant and ongoing game of hitting a mole with regulators and legislators in states across the country for the past decade.
Here’s just a partial list of evasions that have been employed over the years by payday lenders and other high-cost lenders: impersonating a credit repair organization, impersonating a mortgage lender, using a bench as a facade, using a Native American tribe as a front, offering free cash to hook borrowers, lengthening of loan terms when the rules pointed to short-term loans, useless secured loans.
But after fights in cities and states across the country, the industry now faces its most powerful enemy yet. The Consumer Financial Protection Bureau (CFPB), created by the 2010 financial reform bill, has the authority to regulate high-cost loans at the federal level for the first time. And on Thursday morning, the agency released a first draft of new rules that would dramatically reduce the number of payday loans made in the country. You can expect lenders to respond by opening your playbook.
They will not have to study too much. The new rules come with loopholes that are clear and ready to go.
The simplest and most comprehensive way for the CFPB to prevent lenders from charging sky-high interest rates would be, well, to prohibit them from charging sky-high interest rates. But Congress prevented the CFPB from setting an interest rate cap. So instead, the new rules focus on preventing borrowers from rolling over loans over and over again.
TO typical payday loan—Loan of $ 350 with a fee of $ 45— is due in full after two weeks. But if the borrower cannot pay the full $ 395, then the lender accepts only the fee. Two weeks later, the situation repeats itself. This happens often for months and months.
To stop this cycle, the CFPB’s proposal would give lenders a choice. Either they can verify that borrowers can repay the loans or they may face restrictions on how often they can renew a borrower’s loan. The restrictions would essentially prohibit lenders from making more than six payday loans to a borrower in a year.
What would those requirements do to the industry? Based on rough estimates provided by the CFPB in an extensive analysis, if payday lenders were to underwrite their loans, they would be forced to cut their loans between 70% and 80%. If the lenders chose to restrict the number of renewals, the number of loans would be reduced by about 60 percent. And that would certainly stagger many lenders.
Unsurprisingly, the industry is critical of a proposal that, if enacted, would cut profits. Dennis Shaul, director of the Community Financial Services Association of America, an industry trade group, said in a statement that payday lenders were “disappointed” by what he described as the CFPB’s rush to pass judgment. .
The rules don’t end there, and this is where they get slippery. The proposal would also cover longer-term loans, which the CFPB defines as loans that extend for more than 45 days. But unlike the rules for short-term loans, these are limited only to high-cost loans with certain characteristics.
As a result, a lender could avoid being covered by these rules at all, allowing you to renew high-cost loans as much as you want, by offering a loan that lasts at least 46 days as long as you don’t have the features covered. . Payday Lenders have switched to longer-term loans over years, largely in anticipation of a short-term product crackdown.
The CFPB has its reasons for choosing this approach. The rules target what the CFPB considers the two riskiest types of long-term loans for borrowers. The first type refers to loans in which the lender collects payments by accessing the borrower’s bank account. The second refers to loans in which the borrower puts the title of his car as collateral. In those situations, borrowers run the risk of having their bank account raided or having their car repossessed if they fall behind.
But there are many high-cost loans that do not have these characteristics and leave borrowers vulnerable. Two years ago, we reported on World Acceptance, one of the largest installment lenders. The company charges annual interest rates that can exceed 200 percent and often keeps borrowers renewing loans over and over again. Their practices would not be greatly affected by these new regulations. In addition, installment lenders are often extremely aggressive in pursuing late debtors, including filing lawsuits as a means of garnishing debtors’ wages.
The CFPB recognizes that its rules are not exhaustive. “The Office does not seek to identify all potentially unfair, deceptive or abusive practices in these markets in the proposals under consideration for this rulemaking,” states in analysis published Thursday. Rather, the office He says more rules are to come, including separate rules governing lenders like World Acceptance. The CFPB is certainly aware of global and related companies: actually opened a World investigation last year which has not yet concluded, according to a statement from the company last month.
This federal game of hitting a mole is likely to last for years. The rules unveiled Thursday must make their way through a lengthy approval process that will likely take many, many months. It could be years before the new rules actually apply. And at some point in the indeterminate future, the CFPB says it will fix the gaps those new rules leave open. In the meantime, you can expect high-cost lenders to take advantage of every gap and possibly discover other gaps yet to be recognized.