With Payday Loans, Let Banks and Nonbanks Play by the Same Rules
By Jamie Fulmer
January 20, 2015
The New York Times’ "Room for Debate"
Differing regulations of consumer lending for banks and nonbanks have exacerbated economic disparity by obstructing consumers’ ability to make informed comparisons of lending products, pushing some into the murky landscape of illegal lenders and leaving others without reliable access to credit at all.
For the benefit of borrowers and lenders alike, the Consumer Financial Protection Bureau must establish clear and consistent guidelines across the entire marketplace, which would be the underpinning of healthy competition, allowing for consumer safeguards and consistent access to credit. Anything less amounts to the bureau selecting winners and losers, resulting in fewer choices, higher prices and lower-quality services for consumers.
Current federal and state regulations governing nonbank lenders – which offer a variety of financial services from payday loans and auto title loans to pre-paid debit cards and installment loans – contrast sharply with those governing banks, even though some of their products are comparable and even complementary.
Regulated short-term lenders, for example, must advertise their flat fee as an annual percentage rate, a requirement that confuses the actual cost. A.P.R. can be useful when comparing credit options, but borrowers tell us that they do not find it to be a helpful indicator of the price of a short-term loan, in part because it represents the cost of 26 consecutive two-week loans. Banks, however, are not required to disclose the A.P.R. for overdraft credit, which functions nearly identically but involves hidden and recurring charges.
Moreover, overdraft programs have no limit on how often consumers can overdraw their accounts, a requirement some states have instituted for short-term lenders. Where these limits have been imposed, consumers’ short-term credit needs continue unabated, forcing many to choose riskier or more costly options such as overdraft loans or services from unlicensed lenders operating outside of federal and state laws.
Bank regulators have already picked their favored bank-offered credit options, with regulations that effectively forced banks to discontinue short-term loans while preserving costly overdraft programs. Unfortunately, the bureau seems to be considering a similar approach, which will further undermine consumer interests.
The bureau’s director, Richard Cordray, has said that one of its mandates is to level the playing field in financial services. And the bureau has said its rules will be based on research. But by ignoring borrower perspectives and feedback – the bureau’s complaint data showed that regulated payday lenders were involved in a fraction of 1 percent of the total number of reported complaints – its actions call into question whether it will follow through on this commitment.
You can find the full debate here.