What Can The CFPB Do To Regulate Payday Lenders?


Even though the CFPB cannot cap interest rates on payday loans, there is still plenty that the CFPB can do to regulate these lenders. But what should the Bureau do? Some of the trickiest aspects of the payday lending issue have nothing to do with interest rates, and everything to do with how the loans are marketed and used.

Even the staunchest consumer advocate would likely look favorably upon a loan product that allowed people who could not otherwise get credit to borrow money for occasional, unexpected, emergency expenses. I suspect that most would agree that this would be a good and useful loan product even if it cost $15 or $20 for every $100 borrowed, as long as the product were used only occasionally to smooth consumption. This would be true even if the annual interest rate was over 500%. In a way, the annual percentage rate interest would not matter much because the loans would be truly short term, both in design and marketing, as well as actual use. 

In reality, these loans are rarely short –term or occasional. Empirical data show that the loans are often used habitually. The average loan is rolled over numerous times, and many consumers pay on the same loan for years at a time. Moreover, the loans are most frequently used to pay regular, recurring bills like rent and utilities, not for emergencies. This means that once one has borrowed the money, if the person cannot pay it back with the fee, he or she now has another monthly or bimonthly bill to pay. 

Perhaps not surprisingly, it is hard for a lender to make a profit off occasional, emergency-facing customers. Thus, lenders’ marketing encourages customers to use the loans for many non-emergency purposes. Advertisements suggest that the loans are a perfect way to fund vacations, Christmas and birthday presents, and even the bachelor party blogged about earlier. Lenders do anything to keep borrowers in loans. In other words, while lenders claim that they are here to help when travesty hits, and that their customers would be harmed if they faced an emergency, many of the loans are used for discretionary purposes, at the lender’s urging, and at a cost that customers do not understand.

With these realties as a backdrop, I suggest these as possible areas of regulation for payday loans. In order to make sure these laws are followed by an industry very savvy at getting around whatever laws are passed, any violation should result in an inability to enforce the loan, period:

1. A National database for all loans (and if it's not there it is not enforceable).
2. A strict limit on rollovers and total loans per year per customers.
3. Disclosures that consumers can read and understand (not typical TILA garbage), given in the store, in huge print on the documents, and pointed out and repeated orally by the clerk.  These should be written or vetted by someone who teaches school at the level of the average reader in America.
4. No enforcement of mandatory arbitration clauses.
5. No enforcement of mandatory class action waivers.
6. Rules against certain kinds of advertising.

There is far more urgency in dealing with this issue than many people realize, especially for internet payday loans. A huge segment of the payday loan market is reportedly shifting to internet loans, where there is no regulation at all. The wish list above does not address the issues unique to internet lenders but hopefully future blog will.