An inside view of the CFPB review process on the new payday lending rule
It was in late 2014 that the email came in from a member who works for a consumer protection group in DC – “Would North Side like to participate in the CFPB rulemaking process on the new payday lending regulations they plan to introduce?” The answer was a resounding ‘yes!’ North Side Community Federal Credit Union was founded in the 70s to combat redlining in its community, and has remained committed to its mission of serving underserved groups throughout its history. In 1994, we developed a small dollar loan to help combat predatory lending, and went through many iterations of the product before we landed on the current $500-$1000 loan product that we offer today, with very low charge-off rates. Since product inception, we have underwritten over 14,000 small dollar loans, and on an annual basis write about 1,000 non-credit based, small dollar loans. Members repeatedly have expressed their appreciation to our credit union for providing a viable alternative to payday lenders who trap borrowers in egregious cycles of debt. The CFPB agreed that North Side Community FCU was a strong contributor to the rulemaking process. I was invited to fly to DC to contribute to the CFPB Small Business Review Panel on Payday, Vehicle Title, and Similar Loans.
There were several interim phone calls between the invitation and the convening. It was on April 29th, 2015 that the panel was convened at the US Treasury Building. We were each invited to bring one guest, and a member of a credit union trade association attended with me. Approximately thirty small businesses were invited to this process, and the panel consisted largely of payday lenders, a handful of community banks, and two other community development credit unions. We were seated at tables in a U-formation, with representatives from the CFPB, the US Small Business Administration, and the Office of Management and Budget in the center. During the eight-hour process, participants were given cards to raise when they wished to comment on a particular part of the rule. Perhaps the most eye-opening part of the process personally was listening to comments made by payday lenders; concerns were very similar to the ones raised by the credit union industry. The payday lenders claimed to meet a market need for a particular segment of consumers. While it is true that there is a market demand for very small amounts of capital, particularly by borrowers with poor credit, there are fair and reasonable ways to meet the market demand. Credit unions in particular play a significant role, and can to live up to their mission of people helping people by meeting this need in underserved communities.
Our credit union’s small-loan borrowers also have low credit scores and incomes, like payday loan borrowers. But because our loans have affordable payments, reasonable terms, and usually have electronic repayment from a checking account, our delinquency rate has historically been very low over the 20+ years we have been originating these loans. At the same time, individuals have the ability to improve and increase their credit score while repaying the loan (and many do). We also make sure every borrower has the option to access free, individualized credit counseling that may include budget preparation.
If we could not issue these loans quickly, using simple underwriting standards, our borrowers would be very likely to instead turn to payday lenders, who get them money fast with few questions asked. If we had to check borrowers’ credit score or spend additional time underwriting these loans, our already-slim margins would disappear entirely, and we would have to raise prices or discontinue the loans.
So having weighed on in on the CFPB’s initial framework, what do I think of the new rules published on June 2? On the one hand, the CFPB made some important accommodations for credit unions offering loans under NCUA’s PAL program, like not imposing a new real-time payday loan database on them, and allowing up to three loans per six months instead of two. On the other hand, the CFPB removed the 5%-payment standard from its framework (allowing loans where the monthly installment payment is no more than 5% of monthly income). Without that standard, it will be difficult for credit unions operating outside the PAL program, and frankly for banks, to offer small-dollar loans. That’s bad news for consumers, because the PAL program is probably not in a position to replace the 100 million payday loans issued annually.
More credit unions are needed to enter the small dollar loan market to fill the current need and collectively save borrowers billions of dollars annually. Borrowers who are treated well are often loyal customers, and if the industry can re-appropriate those interest savings from high-cost payday lenders and back into the local economy, we all win. If regulators make it too difficult for credit unions to offer these loans, borrowers would only have high-cost payday and auto title loans as an option, with their accompanying interest rates of more than 200 percent. The comment period for the rule ends September 14th. Please consider adding your voice.