As the final days wound down for the Obama administration, it was made crystal clear that the former POTUS wanted to effectively nationalize small dollar, short term loans. In fact, Obama clearly intended for this proposed lending nationalization to be a part of his legacy. However, the measures that the former administration took to effect this lending change could cause big problems for payday advance loan providers.
Back in June of 2016, the efforts to hamstring small payday advance loan companies began to become clearer. That is when the Consumer Financial Protection Bureau (CFPB) released the Small Dollar Lending Rule. This rule was clearly set up to cause serious problems for payday advance loan companies. It laid out rules that would “clean up” the short term lending industry. This rule forces payday advance loan lenders to put serious efforts into determining if their customers will be able to repay their loans; like these lending companies weren’t already doing so…
Most payday advance loan providers have accepted the fact that this rule is going to take effect. However, many lenders in this industry are asking for is that they not be forced to put in more effort to prove the financial fitness of their clients than lenders who provide mortgages, car loans and other large loans do as part of their loan application process. In other words, payday advance loan companies shouldn’t have to put more effort into providing smaller loans that the big loan companies do.
Many industry experts believe that if the proposed rule goes through that it will eliminate 60 to 75 percent of payday advance loan locations. In fact, lending companies have indicated that they would walk away from this industry if the proposal goes through as it was originally written. There are already rules in place that stop big banks from dabbling in the short term lending market. Essentially what you have is a scenario where small payday advance loan companies are squeezed out of the industry, while big banks are blocked from offering small dollar loans. This would effectively allow supporters of Obama’s vision to effortlessly nationalize the industry. What consumers would ultimately end up with would be a post office bank – run by the government – that would take the place of payday advance loan locations.
Like anything else where money is involved, there are massive political implications that must be considered in this situation. Industry leaders have made concentrated efforts to address critics of the payday advance loan industry. To do this, many lending companies have willingly implemented better lending standards and short term lending best practices. Payday advance lending companies also want to implement a rule that allows them to continue to implement industry innovations while still addressing consumer and government concerns.
For example, any efforts that payday advance lending companies use to determine a borrower’s ability to repay should reflect the size and term of the loan. If a lender was to offer a $50 loan that lender should not have to put as much effort into determining the borrower’s ability to repay as they would for a 30 year loan for $100,000.
What’s in the Cards for Payday Advance Loan Companies?
With the recent administration change there may be some relief in sight for payday advance loan companies. These lenders are clearly not out of the woods yet, and there will undoubtedly be industry changes and challenges in the future. The best that consumers can hope for is that Obama’s dream of allowing the government to effectively take over the payday advance loan industry will turn out to be nothing more than an ill-conceived pipe dream.
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