Reading the Consumer Financial Protection Bureau’s proposed rules for regulating payday loans, I couldn’t help but recall the late Yogi Berra’s line, “It’s like déjà vu all over again,” alongside the Hippocratic Oath (“First, do no harm”).
Two years ago, the Office of the Comptroller of the Currency issued rules governing non-collateralized, “advance deposit” loans – a bank product that bore considerable resemblance to nonbank payday loans. Within days of the OCC’s promulgating its rules, every significant bank that offered the product decided to pull it from the market.
The OCC’s 2013 rules imposed strict new underwriting requirements to ensure that the borrower had the ability to repay. The rules limited borrowers to one loan per month, to be repaid within 30 days; imposed a one-month cooling off period between loans; and required a six-month review to determine if the financial situation of the borrower had improved.
The combination of these rules almost guaranteed the product wouldn’t solve most borrowers’ credit needs, and thus wouldn’t generate enough volume to justify the cost to lenders.
Unfortunately, I can’t help but fear an even worse outcome from the CFPB’s proposals: Strict new rules for underwriting; a 60-day cooling-off period between loans; a requirement that no further loan can be made for an entire year unless the borrower can prove his or her financial situation has improved; and a 90-day limit for all such loans in any year.
These limitations, if implemented, all conspire to the same end. Since most borrowers can’t solve their problems in a month, they won’t want this product – and, if they could qualify, they likely wouldn’t need it. Indeed, the CFPB’s own data suggest that revenue for a typical payday lender would drop 60% to 75% under the proposal.