Rules juggle protection of payday loan borrowers and the loan market


Financial Services Updates

What would help overburdened borrowers more – a cap on the total cost of their loans, or lending rules that would prevent them from borrowing so much in the first place? What can regulators do to protect clients from crippling debt, without creating a situation where regulated lenders pull out of the market and desperate borrowers are pushed into the arms of black market lenders?

These are the questions that annoy regulators on both sides of the Atlantic, but also in other jurisdictions. The good news – for the masses of borrowers at least – is that action is being taken.

The US Consumer Financial Protection Bureau (CFPB) in 2017 developed sweeping rules to “end payday debt traps” by requiring lenders to assess whether borrowers could cover “living expenses. basic ”after making their refunds. The changes would also allow customers to repay certain loans with a lump sum without incurring a penalty. They would also limit the number of times a lender can attempt to withdraw a payment directly from a borrower’s bank account.

Those rules have since been changed and delayed, to the dismay of various quarters, including Elizabeth Warren, the favorite to become the Democratic presidential candidate, who said in March that the House financial services committee on which she sits ” will not tolerate anti-. consumer action ”.

In August – when the rules were originally due to go into effect – House Financial Services President Maxine Waters and 101 House Democrats urged the CFPB to reconsider mitigating the changes.

“Contrary to reckless false characterizations, predatory payday loans, car titles and consumer installment loans made without regard to the borrower’s repayment capacity are not acceptable or sustainable sources of credit,” wrote the politicians.

“Research, including that from the Office of Consumer Affairs, has shown that these predatory products trap people in a cycle of debt and leave them in a much worse situation than before taking out the loan,” they added.

The CFPP has remained unchanged and the amended rules are expected to take effect in November 2020. In the meantime, various states have taken over, including 16 that have capped annual payday loan fees at 36% of loan amounts. The CFPB is also looking into other markets, including that of student loans.

Consumer groups and think tanks say more needs to be done.

In the UK, where the Financial Conduct Authority (FCA) took over the responsibility for payday loans in 2014, payday loan costs are capped at 100% of the loan amount. Still, Damon Gibbons, director of the Center for Responsible Credit, a nonprofit organization, says that while the caps are a “really good step forward,” the level at which they have been set is “extremely high” compared to jurisdictions such as Canada. , where some provinces have limited interest rates on payday loans to a maximum of 15 percent.

Last year, the FCA introduced new solvency standards requiring lenders of all kinds to do more to ensure that customers can repay their loans without “significantly affecting their wider financial position.”

The watchdog is reviewing its payday lending rules at the moment, but Gibbons is not hoping for higher standards as the overall feedback on the rules has “been really positive.” The number of payday lenders in the market has grown from 106 to 88 in the past three years alone, according to FCA data.

“It has had a significant impact on many business models,” Gibbons said, adding that companies that were charging “astronomical” fees have now “closed their doors and decided to go out of business.” Foremost among them was Wonga, which collapsed last year after struggling to adjust to the sweeping market changes after 2014, and being forced to pay millions of dollars in compensation.

An article published in 2016 by academics at the University of Birmingham claimed that the contraction in loans could have “negative consequences for some”. The researchers interviewed 21 borrowers who had taken out payday loans, who described how they had borrowed to pay for items such as replacement clothes dryers or to deal with the vagaries of zero-hour contracts.

Researchers have found that borrowers appreciate the “quick and easy” process for applying for payday loans and see them as a “way to manage their situation independently and responsibly” without weighing down family and friends.

Mr Gibbons says he hasn’t seen evidence that the contraction in the number of payday lenders has led more and more people to turn to the black market. Instead, he says they are negotiating with utility companies to have more time to pay and that they are “managing their money better.”

FCA data shows that the number of payday loans granted is actually increasing. In the second quarter of 2018, the most recent date for which the FCA has data, nearly 1.5 million loans were granted, compared to 1.2 million granted in the third quarter of 2016, the first period of the FCA series. Mr. Gibbons would also like the FCA to be more explicit on its affordability rules.

In the United States, Kiran Sidhu, policy adviser at the Center for Responsible Lending (CRL), says federal regulators “are not doing enough to protect consumers.”

Ms Sidhu says there is no “credit crunch” in states that have introduced tougher rules. “There is an offer. . . responsible sourcing, ”she says. “Some people are being kicked out but that’s okay, the government shouldn’t be blessing interest rates at 400 percent.”

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