By PHILLIP LEE
The honeymoon is over between the Consumer Financial Protection Bureau and the payday lending industry.
According to a CFPB report, payday loans and deposit advance products lead to a cycle of indebtedness for consumers.
“This study confirms that payday and deposit advance loans, while designed for short-term, emergency use, are leading many consumers into long-term, expensive burdens,” said CFPB Director Richard Cordray.
“For too many consumers, payday and deposit advance loans are debt traps. And the stress of having to return every two weeks to re-borrow the same dollars after paying exorbitant fees and interest charges becomes a yoke on a consumer`s financial freedom.”
The report, which was released in late April, claimed that loose lending standards, high costs, and risky loan structures may contribute to the sustained use of these products, which can trap borrowers in debt.
The CFPB did recognize that there was a demand and usefulness for the small-dollar loans.
“These types of credit products can be helpful for consumers if they are structured to facilitate successful repayment without the need to repeatedly borrow at a high cost,” the report said.
“However, if the cost and structure of a particular loan make it difficult for the consumer to repay, this type of product may further impair the consumer’s finances. A primary focus is on what we term ‘sustained use’— the long-term use of a short-term high-cost product evidenced by a pattern of repeatedly rolling over or consistently re-borrowing, resulting in the consumer incurring a high level of accumulated fees.
Not surprisingly, the report was not well received by the payday lending industry. In a letter from Dennis Shaul, CEO, Community Financial Services Association of America to Codray, there was a definite sense of disappointment with the CFPB.
Shaul indicated the industry had cooperated with the CFPB over the last two years in sharing and providing information about the industry and CFSA’s members and customers, but was surprised the agency did not seek out more information for the report.
CFSA Strikes Back
“Given our history of collaboration, we were surprised that the Bureau did not attempt to learn more from the industry’s national trade organization to inform its report,” Shaul said.
“Not only are the data demonstrably incomplete and misleading, but the tone, conclusions, and specific language within the report seem aligned with the type of rhetoric that more often comes from advocacy groups that are not always driven by facts, but rather are driven by agendas and unsupported, anecdotal information.”
One of the criticisms was that there was a lack of dissemination of information to the consumer about payday loans and their costs. Shaul aid that was unfair to CFSA members.
“CFSA members adhere to a strict set of mandatory Best Practices, which serve as the industry standard and address many of the concerns raised by the Bureau in its report,” Shaul said.
“These include a right to rescind, a limitation on rollovers, and an Extended Payment Plan that allows customers to repay their payday loan over a longer period of time at no additional charge.
“Given that some lenders operate completely outside the law, and do not provide for the same important consumer protections that CFSA member companies do, it is exceedingly unfair and irresponsible for the Bureau to paint an entire industry with the same brush,” he added.
Shaul indicated that CFSA would continue to work with the CFPB and provide information as requested.
“Despite our disappointment, let me make clear our industry’s continued interest in working collaboratively with the Bureau,” Shaul said.
“As we noted in our initial public response to the report, we appreciate the Bureau’s ongoing efforts to understand the role of small dollar credit products, and we share the mutual goal of protecting consumers and providing them with safe, responsible financial products.”
The Financial Service Centers of America also avoided burning any bridges. “We value our relationship with the CFPB and appreciate their efforts to understand the role of small dollar credit products and our members ,” it said in a statement, adding, “We are still reviewing the full report and plan to discuss the findings with the CFPB in the coming days and weeks, as we continue our dialogue with them.”
At the same time, FiSCA defended its members. “FiSCA members offering payday advances adhere to a rigorous Code of Conduct which can be viewed in detail on our Web site,” it stated. “FiSCA members are licensed lenders who comply with all federal, state and local regulations. Additionally, transparency is a key element of the payday advance product. Before entering into a transaction, the fees and terms of a payday advance are fully disclosed and posted in every store, and included in every contract.”