ALTERNATIVE FINANCIAL SERVICE PROVIDERS ASSOCIATION

CFPB Payday Rule Addresses the Problems, Not the Solution by Jeanne Hogarth

Payday loans, as widely practiced, rarely end with the borrower simply paying the lender back.

Instead, the product typically creates a downward spiral of debt, long past the receipt of the borrower's next paycheck. Therefore, the Consumer Financial Protection Bureau has taken an admirable step to eliminate many of the worst practices in the small-dollar credit market with the proposed rule it released last week.

The agency's proposal protects borrowers from unaffordable loans, cycles of reborrowing, and exorbitant fees-all positive steps in reducing consumer harm. But if the final rule doesn't create a clear lane for good lenders to step in with a variety of new loan product designs, the CFPB risks leaving important consumer needs unfulfilled. Not everyone who can get a payday loan today should be getting credit, but the proposed rule may ultimately leave too many people behind.

The needs that drive consumers toward payday lenders, after all, will remain. A Center for Financial Services Innovation study found that more than a third of all households say they frequently or occasionally run out of money before the end of the month. Further, more than four in 10 households struggle to keep up with their bills and credit payments.

U.S. consumers often have small-dollar credit needs from a variety of causes: spikes and dips in income that lead to cash-flow problems, unexpected expenses and timing mismatches between the arrival of income and bill due dates.

Granted, it is no easy feat to craft a rule that targets the worst practices, can withstand legal challenges and yet can still support the creation of high-quality, profitable products to fill the resulting gap.

Optimally, the bureau's rulemaking - which is in response to the current state of payday lending - is a unique opportunity to point the way to what a better small-dollar lending market could look like in the future. Read the story at AMERICAN BANKER

A Primer to the CFPB Proposed Payday Rule: What You Need to Know. Caren D. Enloe, Smith Debnam Narron Drake Saintsing & Myers LLP

Earlier this summer, the CFPB issued its proposed payday rule. Hailed as an attempt to end "payday traps", the 1,334 page missive addresses both short term loans and certain longer term high cost loans. In addition to restricting the structure of loans, the proposed rule places limitations on how lenders collect on covered loans and mandates extensive record retention policies. The period to comment on the proposed rule runs through September 14, 2016 and stake holders are encouraged to review the proposed rule carefully and submit comments as appropriate.

In a Nutshell. The proposed rule places limitations on short term loans, as well as certain higher cost longer term loan products. Covered short term credit products are defined as being those credit products that would require the consumer to pay back the loan in full within 45 days. Proposed 1041.3(b)(1). Covered longer term loan products are those which have a total cost of credit exceeding 36% and are repaid directly from the consumer's account or income or are secured by the consumer's vehicle. See Proposed 1041.3(b)(2). The proposed rule applies to a wide variety of loan products and will impact nonbank lenders, as well as banks and credit unions. Importantly, the pay day rule excludes from coverage purchase money security credit secured solely by a car or other purchased consumer goods, real property or dwelling secured credit if the lien is recorded or perfected, credit cards, student loans, non-recourse pawn loans, overdraft services and lines of credit. Proposed 1041.3(e).

Conclusion

As noted, the comment period for the proposed rule will run through September 14, 2016 and stakeholders should review the proposed rule carefully with counsel and submit comments as appropriate. It is clear that the payday proposed rule has the attention of the legislative branch as well as major stakeholders and it is likely there will be some modifications before a final rule is adopted. When finalized, the CFPB has proposed that the final rule will not take effect under 15 months after publication of the final rule. There appears, therefore, to be a fairly lengthy time period for the industry to ramp up in anticipation of the effective date.

Read the entire primer at LEXOLOGY

What If You Needed A Loan, Like Now?

Individuals taking out payday loans are not likely to have credit histories, and thus have few options when they need short-term financing. Most lenders, rightly seeing these individuals as high-risk borrowers, refuse to loan them money. After all, these borrowers are much more likely than others to default on their loans. A third of payday borrowers defaulted within six months of taking out loans. Nearly half - 46 percent - defaulted within two years.

Payday lenders, however, are willing to take the risk - if adequately compensated.

In this light, the high interest rates seem much less nefarious. Imagine you were faced with such a borrower. Wouldn't you require a big potential payout to offset the risk?

While some may accept that a higher interest rate makes sense, others are quick to demonize payday lenders as exploiters. So lawmakers and consumer advocates propose caps on interest rates.

Why the Ban Hurts Borrowers

Payday lenders' average profit is 7.6 percent. Starbucks' is 9 percent.First, despite these high rates, profit margins for payday lenders are less than impressive. One study found the average profit earned by payday lenders to be about 7.6 percent. The average Starbucks franchise earns about 9 percent. So it's difficult to argue that these high rates translate into exorbitant, exploitative profits.

Second, the call to cap interest rates fails to recognize the unique nature of payday loans. That average APR of nearly 400 percent reflects interest rates on an annual basis. But the average payday loan is for two weeks. Compared to other loans, like a traditional 30-year mortgage, the annualized rate of a short-term loan looks outrageous. But it's not an apples-to-apples comparison. Read more at VALUEWALK

How voluntary benefits help address the reality of employees' poor financial health

Focusing on financial wellness isn't an ongoing fad. It's an issue that is here to stay for the foreseeable future and the numbers paint the troubling picture of employees' financial literacy.

In fact, lack of money management skills among employees may be a bigger issue than many employers realize. Even more serious is the impact employees' lack of financial health is having on companies. Employers who accept this reality and then provide financial wellness education and benefits to help employees improve their financial literacy are on their way to having more productive workers as well as an enhanced bottom line.

The state of employees' financial health

Just looking at how employees are handling their finances indicates why they are financially stressed and less productive at work. Many hard-working Americans are struggling with their financial situation. They have trouble meeting monthly expenses, making minimum payments on credit cards, obtaining major purchases they need to make, and saving money for unexpected emergencies. And their financial stress affects their job performance, making it a problem for their employer.

Look at the statistics. According to a Harris Poll on behalf of Purchasing Power conducted last November among U.S. adults employed full-time and/or spouse is employed full-time:

40 percent don't have at least $2,000 in emergency savings for unexpected expenses, such as car repairs, replacing major appliances or an unexpected health emergencies that may occur; and

34 percent have had trouble meeting monthly household expenses, like rent/mortgage, car payments, cable bills and credit card bills. Read more at BENEFITS PRO

A public comment period has begun and will continue through September 14th.

Our goal is to generate as many different comment letters from our member companies, including you, your employees, business associates, contacts and customers. 

We need to count on you to get involved to protect

GAO Releases Report on CFPB's SBREFA Panels

Despite concerns over the payday lending SBREFA process, the GAO failed to include the payday loan SBREFA panel in its review; the limited review nevertheless identifies areas for improvement.

T he U.S. Government Accountability Office released a report Wednesday about the Consumer Financial Protection Bureau's adherence to its obligations under the Small Business Regulatory Enforcement Act. The report addressed the extent to which CFPB solicited, considered, and incorporated small entity inputs into its rulemakings, as well as the views of the small entity representatives on the CFPB's rulemaking process. Under SBREFA, the CFPB is required to convene a small business advocacy review panel for rules that are expected to have a significant economic impact on a substantial number of small entities.

While the GAO found that the CFPB completed required steps for conducting SBREFA panels and therefore did not issue any specific recommendations, it is important to note that its review included only the four SBREFA panels that resulted in a final rulemaking as of April 2016. This means that the payday loan rulemaking, which generated a lot of concern over the CFPB's faithful adherence to its SBREFA responsibilities and was seemingly the impetus for the requested GAO study, was not included in the GAO's review.

Despite this limitation, however, the GAO report contains information that sheds light on the small entity representative (SER) experience serving on a SBREFA panel, as well as the perceived impact that the SBREFA process has on the CFPB's final rules. Read the report at ACA INTERNATIONAL

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