While the problems associated with payday lending are recognized across the nation, oversight and supervision of payday lenders has been fragmented. Some states have sought to protect consumers, while other states have remained laissez-faire in regulating this multibillion dollar industry. Innovation and technology advancements have also made regulation more difficult, as new online platforms have eliminated the need for lenders to maintain the local, physical presence that was once necessary for them to conduct day-to-day business operations in various communities. Numerous lenders now utilize models that are entirely online-enabling borrowers to go from application to approval without ever stepping foot into a storefront location.
For many consumers, fintech innovation has increased their ability to access credit-and without it, some would have no means to acquire the credit they need during difficult times
Innovation has created new challenges in promoting safer access to credit, but it can also be an integral part of the solution. Financial innovation has been a driving force moving banking and lending into a technologically-advanced reality.
CFSI has conducted numerous studies of innovative lending models and has found that many of them represent promising alternatives to the various high-cost loan products commonly in use. Yet without regulation alongside innovation which tend to bring costs down, these alternatives are not consistently available nationwide. Often, the same lenders offer affordable loan products in markets where state laws limit their ability to charge excessive fees or usury interest rates, while extending drastically different products in states where there is little payday loans for bad credit Texas or no regulatory oversight.
The Texas market, with its limited statewide regulations, illustrates this problem. Lenders offer options such as flexible terms, online platforms or monthly-payment selector tools to better serve their borrowers. While, at first glance, they might appear to provide credible payday loan alternatives, further review of their lending disclosures reveals that, on a state-by-state basis, many of these innovators continue to offer products that can be classified as predatory. It is important to note, that while there is no universally recognized definition for the term predatory, the FDIC provides insight into loans, products and practices that can be classified as predatory and has identified elements which appear to indicate the presence of predatory lending. These elements include:
- Making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation;
- Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”); or
- Engaging in fraud or deception to conceal the true nature of the loan obligation, or ancillary products, from an unsuspecting or unsophisticated borrower.”
In the absence of national lending guidelines, consumers in certain states are granted greater financial protections than others who reside in states where their respective legislatures have not acted. CFPB under its regulatory authority has now taken its first steps to formally address this issue.
Lenders who offer small-dollar loans are subject to this jurisdiction whether they operate online or from physical storefront locations. In , the CFPB proposed new rules that will govern certain payday, high-cost installment, open-end credit and auto title loan products. These rules include income and “ability to pay” verifications, loan structure and rollover limitations, as well as caps on the number of loans borrowers can have during a given time period or in succession. The CFPB also presented its recommendations on account drafting, advance notice requirements and the new “debit attempt cut-off rule” which requires the lender to obtain a new authorization after two unsuccessful attempts to draft a borrower’s account. The written comment period is currently underway and slated to close on .