Abuses Concentrated Among Unregulated Lenders, Pew Finds
Last week, the Pew Charitable Trusts’ advocacy arm released its latest paper on short-term lending, “Fraud and Abuse Online: Harmful Practices in Internet Payday Lending.” Like its earlier papers, this one fails to examine the critical context in which consumers choose payday loans (ignoring, for instance, substitute products like bank overdraft programs).
However, the Pew Small-Dollar Loans Project has at least begun to look at the larger question of what happens when consumers don’t have access to regulated short-term lending.
Millions of consumers rely on short-term credit services every year to make ends meet and to manage unexpected expenses. They are best served by a competitive and regulated marketplace.
Pew examines the various licensing and regulatory arrangements used (or avoided) by some lenders and finds that “aggressive and illegal actions are concentrated among the approximately 70 percent of lenders that are not licensed by all the states where they lend and among fraudulent debt collectors.” This is a key point, because although the report mostly refers to “online lending” generically, what Pew has highlighted is the vast difference between regulated and unregulated lenders.
Advance America (and other members of the Community Financial Services Association) utilizes a compliance structure that Pew describes as “licensing in multiple states,” meaning that all of our customer interactions are highly and effectively regulated by the states in which we offer loans, in addition to being regulated at the federal level. Pew reports that “companies using this model generally are not implicated in the types of illegal practices described in this report.”
Other highlights of the report include:
- “Nine in 10 payday loan complaints to the Better Business Bureau are made against online lenders, although online loans account for only about one-third of the market.” [Endnote 2 further notes that of these, “data indicates [sic] few complaints against some large companies.”]
- Abusive practices are not universal. “Aggressive and illegal actions are concentrated among the 70% of lenders that are not licensed by all of the states where they lend.”
Pew’s findings reaffirm the Consumer Financial Protection Bureau’s (CFPB’s) complaint data, which found that complaints about payday lending are incredibly low and that the overwhelming majority of complaints are not about regulated lenders. This is also affirmed by last year’s Harris Interactive study of actual customers of regulated payday lenders, which showed consumers are overwhelmingly satisfied with the product. These additional data points can help the CFPB â€“ and by extension advocacy groups such as Pew â€“ follow complaints to focus on the actual threats to consumers who choose short-term lending, instead of continuing to engage in an ideological campaign against a service that millions of American consumers recognize as a valuable option.
Pew concludes that “federal regulators, particularly the Consumer Financial Protection Bureau, should expand their efforts to enforce relevant laws, protect consumers, and ensure the soundness of the banking and electronic payment systems. They should also undertake new efforts to establish strong, clear guidelines for the small-dollar lending market as a whole. Banks, credit unions, finance companies, online lenders, and the next generation of innovators need clear and consistent rules.”
Taken together, these findings amount to an explicit call for all 50 states to provide for a regulated, competitive short-term lending market.