The payday lending industry has been a fixture in the common American’s financial life since the 90’s, but it enjoyed rapid growth and success after the 2008 financial meltdown. Today, as per industry analyst estimates, there are approximately 20,600 payday advance locations across the U.S., and the industry has lent around $38.5 billion in short-term loans to approximately 19 million American households. Not only that, the industry makes significant contributions to the U.S. and various state economies by providing employment to 50,000 Americans who earn $2 billion in wages and generate more than $2.6 billion in federal, state, and local taxes. But late last year, the industry was rocked when the Consumer Financial Protection Bureau (CFPB) released a regulation knows as the “payday lending rule”. The rule put the onus on the lender for determining whether a borrower can repay a loan and restricted the number of loans a lender can make to the borrower.
What is the Payday Lending Rule?
Lending Times had a chat with Quyen Truong (partner at Stroock & Stroock & Lavan LLP) to discuss the ramifications of the payday lending rule to the alternative lending market.
The payday lending rule was finalized because the CFPB believed that high interest and continuous refinancing of payday loans was leading to borrowers getting stuck in a never-ending debt trap. Borrowers who refinance or roll over an existing loan in turn pay additional fees and high interest, which flows into the lender’s bottom line.
Truong believes the new rule is highly damaging for payday lenders because lenders would be forced to conduct an analysis on a borrower’s ability to repay debt. Such analysis is unfeasible for small dollar loans. Additionally, there is a 30-day cooling off period, which means lenders can not provide follow-up/rollover loans during that period. The idea behind this cooling off period is to prevent borrowers from getting stuck in a vicious debt trap.
The Impact On the Payday Lending and Alternative Lending Industries
The regulation is expected to impact the payday lending industry adversely and may wipe out a large portion of industry revenue, Truong said. But she believes that online lenders are more innovative when it comes to underwriting, and because they are agile and nimble, they are better equipped to adapt to the new rule. Having said that, the rule will still adversely impact the industry and many lenders could go out of business because of their inability to comply with the new regulation. On the other hand, it will be an opportunity for sophisticated lenders to devise an efficient process to conduct a repay analysis using technology. As for installment lenders that do not fall under the scope of this regulation, this rule is an opportunity to increase their market share, Truong said.
Will the Rule See the Light Day or Be Shut Down?
Given the backlash the regulation received from payday lending industry players, Truong believes the regulation will go through a major revamp and might even get completely eliminated under the Republican-controlled Congress.
Since it is threatening to wipe out the majority of payday lenders, there is a real possibility the CFPB will do a major overhaul to the repay analysis requirement, which will significantly improve the ability of payday lenders to conduct their businesses. In fact, CFPB Director Mick Mulvaney recently sent a memo to his staff stating the bureau’s focus will be on focus on ‘quantifiable and unavoidable harm to the consumer’ and the bureau ‘won’t go looking for excuses to bring lawsuit’. And the bureau has recently dropped more than one lawsuit against payday lenders, even online lenders, it had targeted before Mulvaney’s appointment.
Truong also believes the 30-day period clause will at least undergo some modification where the cooling off period will either be reduced or the number of loans required to trigger it will be increased. Currently, the rule stipulates the trigger is three short-term loans or longer-term loans with a balloon payment.
The Future of Short-Term High-Interest Lending
Truong believes the CFPB, under Republican leadership, will try to bring a semblance of normalcy to the business environment. But if states step up regulatory action or start adopting new laws, or state attorneys general start suing payday lenders for compensation, it can prove to be extremely problematic for lenders, especially online lenders.
The payday loan industry had been relying on the Congressional Review Act to address payday rule inequities, but the chances of success seemed limited given the congested congressional calendar. The fact that the CFPB is reconsidering the rule and is open to amending it is a major relief for the industry.
Truong also believes that, in order to overturn the rule, the industry needs to play a pivotal role. In that endeavor, payday lenders (including online lenders) need to provide additional evidence and analysis to the CFPB. Only hard data will enable the bureau to defend against legal challenges to a change of its stance on the payday lending rule.
Who is Quyen Truong?
Established in 1876, Stroock & Stroock & Lavan LLP is one of the oldest law firms in the U.S. Headquartered in New York City, the firm has nearly 300 lawyers.
Stroock & Stroock & Lavan LLP provides legal services to various financial institutions like investment banks, commercial banks, insurance and re-insurance companies, mutual funds, multinationals and foreign governments, industrial enterprises, and entrepreneurial ventures. Truong provides regulatory compliance counseling and defense for clients in highly regulated industries with a main focus on CFPB, FTC, DOJ, banking agencies, and state attorneys general and regulators. Prior to this, she served as assistant director and deputy general counsel for CFPB and legal counsel at the Federal Deposit Insurance Corporation (FDIC).
The firm and Truong have represented online lenders and small dollar lenders, as well as their investors, among other financial industry players. She has also represented investors in the industry.
The fact that the CFPB has revisited the rule making process means half the battle has already been won. Considering the political and legal complexities, online lenders still have a long road ahead of them. There is still a big question mark on which way the pendulum will swing, but expert advice from experienced law firms like Stroock & Stroock & Lavan LLP is a prudent investment for online lenders looking for protection from a regulatory crackdown.
Written with Heena Dhir.