What Will Replace Payday Loans?

Nov 29,2017

There is no question that payday loans are bad for consumers. These loan companies prey on poor and minority individuals who generally lack better banking options. Fortunately, the Consumer Financial Protection Bureau (CFPB) has issued regulations that will curb the supply of the most dangerous of these loans: loans for small amounts of money that are high in fees, with very short repayment periods.

The CFPB rules specifically target payday and title loan companies that require repayment in 45 days or less. The lenders will now have to assess a borrower’s ability to repay the loan and set limits on how many times the borrower can roll over the loan. Additionally, they will not be allowed to repeatedly try to automatically withdraw from a borrower’s account.

The regulations should help stop the worst of these lenders from taking advantage of consumers. However, a problem will remain. Consumers will still be in need of small, easy-to-acquire loans. The CFPB has not required other financial institutions to provide loan options to take the place of payday loans. So what will the millions of Americans (2.5 million households use payday loans annually) who rely on these loans do now? The reality is that there are not many options for poor Americans to turn when they need a small loan to keep the lights on. Large, profit-seeking banks are unlikely to offer small loans to borrowers with low incomes and poor or nonexistent credit.

Payday Lenders Move to Longer Loans

Something that many payday lenders have already begun to do is shift toward longer loans. The loans are high in cost and often have installment schedules that are unmanageable for consumers. Unfortunately, these types of loans are largely unregulated, which could leave desperate consumers in danger.

State Regulations on Payday Lenders

Some states have mandated that lenders who offer small and installment loan options provide borrowers with affordable repayment structures, reasonable payment times and lower fees. In California, lenders who make loans of less than $2,500 are limited in the amount of interest they can charge. However, the state currently places no limit on the interest lenders can charge on loans of higher amounts. In 2015, more than half of all loans for $2,500 – $5,000 carried interest rates higher than 100%. With the new regulations, more lenders are likely to shift toward these larger loans, which could leave many Californians in a very bad place financially.

What About Credit Unions?

Credit unions were essentially formed to service their communities. They were the original small lender for consumers. These institutions usually have enough cash to be able to offer small-dollar loans at cheaper rates than payday lenders. However, these loans certainly won’t be big revenue streams for credit unions. While they are not-for-profit institutions, they still need profitable loans in order to run. They would need an incentive to begin offering these small-dollar loans, such as the ability to process the loans quickly and cheaply. Credit unions will also need a blueprint for these loans, which would likely become the job of the Federal Insurance Deposit Corporation (FDIC) and other regulatory agencies.

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Will Banks Offer Small-Dollar Loans?

Convincing banks to offer these loans will likely prove more difficult. They are larger companies that are accountable to their shareholders. Several years ago, the FDIC piloted a program with 30 community banks to test the profitability of small-dollar lending. The results of the test were not definitive. However, some banks expressed interest in providing the loans for the sake of building relationships in their communities.

In any case, regulators including the FDIC, Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration (NCUA) will need to provide guidance and regulation to help banks and credit unions profitably provide small-dollar loans to consumers. The need is certainly there. Roughly 12 million Americans use payday loans each year. Financial institutions must work alongside state and federal regulators to provide these Americans with fair lending options.

“Far too many Americans find themselves stuck in a cycle of debt due to their reliance on payday loans. It is time we found better ways to help everyday consumers get loans that are fair and manageable,” said Attorney Walter Clark, founder of Walter Clark Legal Group.

Our firm has been handling personal injury cases throughout the California Low Desert and High Desert communities for over 30 years. With a 95% success rate, the California personal injury attorneys at Walter Clark Legal Group will fight to hold those responsible for your loss accountable and win compensation to cover medical bills, lost wages, and pain and suffering. If you have been injured and want to discuss your legal options, contact us today at (760) 777-7777 for a free consultation with an experienced personal injury lawyer. We have offices in Indio, Rancho Mirage, Victorville, and Yucca Valley and represent clients through the entire California Low Desert and High Desert communities.

DISCLAIMER: The Walter Clark Legal Group blog is intended for general information purposes only and is not intended as legal or medical advice. References to laws are based on general legal practices and vary by location. Information reported comes from secondary news sources. We do handle these types of cases, but whether or not the individuals and/or loved ones involved in these accidents choose to be represented by a law firm is a personal choice we respect. Should you find any of the information incorrect, we welcome you to contact us with corrections.