New U.S. rule on payday loans to hurt industry, boost banks -agency (updated)

QC Holdings

05/10/2017 22:54

(Adds legislative and lawsuit threats, banking effects) 
    By Lisa Lambert and Pete Schroeder 
    WASHINGTON, Oct 5 (Reuters) - Revenues for the $6 billion 
payday loan industry will shrivel under a new U.S. 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 on Thursday 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.  urn:newsml:reuters.com:*:nL2N1LU1X2 
    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 percent 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 Centers 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 checks and suffer under the burden of greater 
debt," he said. 
     
    BRINGING BANKS INTO THE MIX     
    The agency narrowed the final version of the regulation to 
focus on short-term borrowings, instead of also including 
longer-term and installment debt. It exempted many community 
banks and credit unions from having to ensure borrowers can 
repay loans, as well.  
    Both moves could make it easier for financial institutions 
to fill gaps left by payday lenders who close shop under the new 
rule. 
    "Banks and credit unions have shown a willingness to serve 
these customers with small installment loans, and they can do it 
at prices that are six times lower than payday loans," said Nick 
Bourke, director of the Pew Charitable Trusts' consumer finance 
project.  
    The Office of the Comptroller of the Currency on Thursday 
lifted restrictions that kept banks from making small-dollar 
loans, which will further aid in the transition.  
    The leading bank lobby group, the American Bankers 
Association, applauded the CFPB and OCC, and the trade group 
representing independent banks, Independent Community Bankers of 
America, said the exemption provides flexibility to make 
sustainable loans to customers in need. 
    But the Community Bankers Association representing retail 
institutions said only the smallest banks qualify for the 
exemption, which applies to lenders making 2,500 or fewer 
short-term loans per year and deriving no more than 10 percent 
of revenue from those loans.  
    "The CFPB whiffed at an opportunity to provide assistance to 
the millions of Americans experiencing financial hardship," CBA 
President Richard Hunt said. 
 
 (Reporting by Lisa Lambert; editing by Leslie Adler and Cynthia 
Osterman) 
 ((lisa.lambert@thomsonreuters.com; +1-202-898-8328; Reuters 
Messaging:  lisa.lambert.thomsonreuters.com@reuters.net)) 
 
Keywords: USA CONSUMER/PAYDAYLOANS