Several years ago, one of our local traditional installment lenders said that payday and title pledge lenders were going to cause a serious disruption in traditional installment lending. Boy was he right.
As reported recently, the CFPB's Proposal released for comment on June 2nd treats vehicle secured loans of more than 45 days with a Total Cost of Credit (i.e., an “all-in APR”) of greater than 36% as a “longer-term covered loan.” The significance of this designation is that a lender of such a loan must jump through a series of analytical hoops before it may make such a loan.
So, what is wrong with that? That answer lies in the nature of the traditional installment lending business itself, and how consumer loans are made and their cost structure determined. Economics dictate that smaller dollar consumer loans (basically under $2500) cannot be made profitably and securely today within the all-in APR guidelines set forth in the Proposal. And, when additional costs of compliance are layered onto such loans, such increases will be passed along to the borrower. It is also a certainty that the break-even point for lenders will dictate the need for a higher loan amount.
These issues were covered with Director Cordray when he attended the meeting of the National Installment Lenders Association (“NILA”) in Washington earlier this week. The take away by attendees is that the Bureau's Proposal is not cast in stone, and the Bureau is open to rethinking its positions—but only based on data. Recall that the CFPB prides itself on being a data driven agency.
The Director generally introduced the Proposal and explained that the CFPB intends to require an ability to repay determination for consumer loans creating and existing for repetitive roll-overs, whether the characterization of the loan is payday, title pledge or installment. The Director heard from the group that the traditional installment lenders represented by NILA do not make consumer loans that abuse via a cycle-of-debt, because traditional installment loans are underwritten, fully amortizing with equal installment payments, made with no prepayment penalty nor balloon payments, made with no required leveraged payment mechanism, and generally reported to credit reporting agencies.
While acknowledging that this type of loan product in general may be beneficial to consumers, the Director said that the bureau is concerned that very high-cost lenders can adapt to include these indicia; and, if the Rule ultimately adopted with respect to vehicle security in particular does not address these loans as “covered” then the intent of the Rule to rein in abusive loans will not have been achieved.
The Director was aware that high-cost lenders have already succeeded in a legislative effort to avoid the Proposed Rule. An installment loan made under the new Mississippi Credit Availability Act would not be a covered loan if vehicle security is not taken. The Director invited NILA to address this issue and make suggestions in any comment letter that it chooses to write.
Director Cordray was generous with his time and NILA made its presentation efficiently in recognition of the Director's busy schedule. The hard work begins now: That is, we need to suggest changes in the Proposal, backed by data, because as one presenter said earlier in the meeting, “The demand for credit cannot be legislated away, but the source for credit can be.”