Making money from offering short-term loans to borrowers is a time-honored tradition that goes back centuries. Yet many of the low-income Americans who rely on the modern-day payday loan have difficulty repaying their debt, and that can cause a downward debt spiral that can lead to dire financial consequences.
Less than four months ago, it appeared that the uproar against payday-loan providers might result in the ultimate demise of the industry. But a recent move from the regulatory agency that initially set new rules in motion to place restrictions on payday lenders has signaled instead that the industry will likely have a new lease on life. That will put the onus back on those who take out payday loans to protect themselves against the profit-seeking motives of the lenders providing these sometimes-disastrous financing options.
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Payday lending and the CFPB
Back in October 2017, the Consumer Financial Protection Bureau (CFPB) finalized rules aimed at helping consumers avoid the traps of payday loans. In the words of former CFPB Director Richard Cordray: "Too often, borrowers who need quick cash end up trapped in loans they can't afford. The rule's common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail."
The rules would have required lenders to take a number of steps before extending credit to borrowers. Payday lenders would have to determine whether borrowers could repay the loan while still covering basic living expenses and other major financial obligations. Exceptions to this full-payment test would exist for certain loans intended to help borrowers eliminate debt more gradually, and the rule encouraged alternatives to the riskiest payday loans such as credit union personal loans and wage-advance programs from employers.
In addition, the rules implemented a debt-attempt cutoff, which prevents the lender from seeking to draw money repeatedly from checking or prepaid card accounts more than two times without getting a new authorization from the borrower in question. This would stop lenders from continually seeking to tap accounts, which often leads to unauthorized payments, or ballooning overdraft fees from their banking institutions.
An about-face
On Jan. 16, the CFPB reversed course on the payday lending rule. A short statement said that, "the Bureau intends to engage in a rulemaking process so that the Bureau may reconsider the Payday Rule," and it also reminded would-be lenders that the rule wouldn't fully require compliance until August 2019.
New acting CFPB Director Mick Mulvaney, who has criticized the agency's actions as "pushing the envelope" in financial regulation, took over after Cordray left the CFPB in November. Mulvaney also made no request for operating funds for the bureau for the quarter, signaling to some that it would make fewer efforts at enforcement of existing rules than it made previously.
Will payday lenders thrive?
Many see the move as a victory for companies like FirstCash (FCFS) and EZCORP (EZPW 2.78%), which would benefit from continuing to do business without the new rules being enforced. FirstCash has seen a massive ramp-up in business recently, with revenue over the past 12 months doubling from year-ago levels and net income nearly tripling following its merger of equals with Cash America International.
EZCORP hasn't seen much revenue growth, but it has reversed losses from previous years and posted a net profit over the past 12 months after undergoing a successful restructuring effort. Investors might want to look closely at those businesses to see whether a new upswing could continue their recent successes.
For consumers, the change in direction from the CFPB shouldn't lead anyone to think that payday loans are any more attractive than they've ever been. The biggest problem with payday loans is that you'll typically have to pay sizable upfront application fees every time you renew a loan, and with short-duration loans like these, those application fees add up over time and provide an even larger source of income for lenders than the nominal interest rates that they charge to borrow.
Payday lenders might thrive under laxer regulation, but you don't need to support them. Steer clear of payday loans and find more reputable, less expensive ways to meet your financial needs as you figure out long-term strategies to stay out of debt once and for all.
