NEW YORK (AP) — The controversial $38 billion payday lending industry is about to be regulated at the federal level for the first time based on new regulations proposed recently by the Consumer Financial Protection Bureau.
The regulations are designed to keep people from falling into what the CFPB calls a "debt trap," where borrowers can get stuck paying off a high-interest loan for months on end for what is supposed to be a two-week loan.
Nick Bourke is the director of the Pew Charitable Trusts' small-dollar loans project. Bourke and his team spent several years researching payday loans, auto title loans and other kinds of short-term emergency loans in hopes of coming up with policy recommendations.
When the proposed rules were announced in early June, Pew was one of the few non-industry groups to come out mostly against them. Bourke spoke with The Associated Press about what Pew recommends for the industry and how it should be regulated. Answers have been edited for length and clarity.
Q. In the five-and-a-half years you've studied the payday lending industry, what are some of the conclusions you've reached?
A. A surprising number of American households are what you would call "income volatile," which means their income goes up or down by more than 25 percent month-to-month. That explains why people do turn to credit like payday loans, to pay bills, stay afloat, etc., and it also explains why so much of the credit on the market is not helping folks. Payday loans, for example, instead of truly helping people bridge gaps, just give them a lump of cash today that only becomes another untenable burden on their finances. It just makes their situation worse.
Q. Why does the industry need to be regulated at the federal level? Regulation of payday lending has been largely left up to the states.
A. There's no federal regulation of payday lending today, and we need it in order to set clear and consistent standards across the entire industry, no matter if the loan is coming from a state-licensed payday lender or a federally chartered bank or credit union.
Q. When the CFPB announced its proposal, Pew had a mixed opinion of their ideas. Why?
A. The real solution are installment loans that are paid over time, six months for a $500 loan, and each installment should not be more than 5 percent a borrower's paycheck. The CFPB proposal did not include this type of standard.
Q. Your organization has been quite public about the need for banks to get into this market. Why? Also, payday lenders say the proposals will create a void of small-dollar loans because many of them would go out of business.
A. There are going to be fewer two-week payday loans on the market because of the CFPB's proposal, but the payday lenders have already shifted to installment lending. The CFPB rule will not stop that. There will still be plenty of 400 percent annual interest rate installment loans on the market. The reason why banks should get into this space is because the borrowers are already their customers. You have to have a checking account to get a payday loan. Banks have diversified set of products, more customers, low cost of funds, etc. that allows them to make loans at a greatly reduced costs compared to a payday loan.
Q. Credit unions also do small-dollar loans. Would that provide an alternative?
A. The National Credit Union Administration created a program called the Payday Alternative Lending Program, or PAL Program. It basically allows a credit union to make a payday loan at a 28 percent interest rate plus a $20 application fee. One in seven credit unions participate in the program and it's been around several years, but in 2014 the PAL program only made 170,000 loans. That's compared to more than 100 million payday loans. The PAL program will not scale because it does not give the lender the ability to automate the loans and does not give lenders enough revenue.
Q. Is there a place in this country for small-dollar emergency loans like payday loans?
A. Credit can help people when they are in a bind and they need assistance paying bills, but only if the credit is structured in a certain way. The research is quite clear: the way to structure the loan is to have an installment loan paid off over a period of several months, not just two weeks, and it has small payments. The average payday loan borrower is making around $30,000 a year. They are making reasonable amounts of income, but they are having trouble making ends meet. A payday loan takes too much of a person's paycheck.