Working with Regulators on Credit Access, Options
By Dennis Shaul
Over the last few years, and in particular in 2013, the payday lending industry has faced an unprecedented level of attention from regulators and policymakers.
All companies are under heightened scrutiny as the effort to eliminate bad actors that operate illegal, unscrupulous businesses remains paramount.
It is certainly a worthy effort and one that the Community Financial Services Association supports, and the attention from certain state and federal agencies underscores the important collaborative relationship between regulators and our industry.
Ultimately, pragmatic regulatory scrutiny benefits both consumers and legitimate lenders — the vast majority of our industry — and weeds out the bad actors from the reputable lenders and ensures safe, short-term credit options remain accessible.
Further, it brings to the forefront a necessary national discussion of the short-term credit needs of millions of Americans — needs that for too long national policy has failed to address in a productive way.
Filling a Need
As short-term lenders well know and as evidenced by the continued success of short-term lending businesses, alternative financial services, including payday loans, fulfill an important role in the credit market – one which traditional banks are generally unable to fulfill.
A 2011 study by the National Bureau of Economic Research found that half of American households could not come up with $2,000 from all available sources for an unexpected expense in a 30-day period.
Roughly half of all American families are living paycheck-to-paycheck, and lack adequate savings to cover unplanned expenses. Millions of Americans simply do not have the cash flow to pay all their bills at the beginning of the month.
To serve these millions of Americans today and with an eye on the future, members of CFSA have upheld the highest standards in our industry. All our members follow a mandatory set of Best Practices to help protect our customers. As part of these Best Practices, all our members are licensed in every state where they operate. Because of these standards, none of our members were in the crosshairs during the recent crackdowns on illegal lending.
While we are proud of our Best Practices, we see 2014 as a year to expand upon them — working within the industry and with our partners in the regulatory space – toward the ultimate and singular goal of improving the customer experience.
At both the federal and state levels, we are well-positioned to help inform a conversation on short-term credit. Our members, after all, have been providing these products for more than 20 years and have the analytic experience and expertise.
We are fully committed to working in 2014 to push forward several initiatives that will improve the loan experience for our borrowers.
For example, more substantive research is needed to understand the various ways in which consumers use short-term credit products and how this use impacts upon their financial welfare. While regulators and consumer advocates released several reports in 2013, those studies presented very little in terms of hard or meaningful data that could inform product changes. Many of these reports are based on anecdotes and perceptions rather than a thorough, scientific analysis that stands up to academic rigor.
In order for regulators to develop effective rules, we need a better, data-driven understanding of how these products actually affect borrowers for better or worse. With this information in hand, both the industry and state and federal governments can work to enhance the customer experience.
Further, both industry and regulators should work hand-in-hand over the next several years to explore product innovations. This will ensure that we are evolving to meet changing consumer needs. The states have for long served as a laboratory for regulatory experimentation and product development and, indeed, states have the most experience regulating short-term credit products.
As an example, several states have authorized additional loan products with different terms that provide consumers with options. Continuing to experiment and innovate can only benefit consumers in the form of more products and more choices.
Underwriting is another important issue for the industry, and it is a primary concern of the Consumer Financial Protection Bureau, as evidenced by its white paper released earlier this year. Better, more stream-lined underwriting is needed for short-term credit products in order to discern those borrowers who are likely to default or may have difficulty with repayment.
However, traditional underwriting is too time-consuming and expensive for short-term, small dollar loans. With the unique structure of our loans and the immediacy in which they are needed, complex underwriting could create a barrier to entry.
Instead, we need to develop new ways, using new data sources, to evaluate a borrower’s ability to repay a loan. Several companies are already exploring alternate forms of underwriting, which will help to better evaluate who will benefit from using short-term credit.
Regulation will always come with challenges and opportunities. Overregulation can lead to limited choice for consumers or onerous standards that make it difficult to do business. Balanced regulations, which are the result of well-reasoned discussion and debate, create markets in which consumers benefit and businesses can succeed.
Next year will be an important one, as regulators at all levels develop rules that will define credit markets for years to come. CFSA looks forward to participating in these discussions to improve short-term credit for consumers, and continue to offer products that meet their unique needs.