How the CFPB is Shaping the Short Term Lending Industry

Before large financial institutions evolved in the current banking world, it wasn’t uncommon for individuals that had a good relationship with their neighborhood bank to take out a short term loan.  By definition, that meant borrowing funds for one-year or less for an unexpected expense or to purchase a needed commodity.  Interest rates were typically higher, however banks could make hundreds of loans and earn a small profit on each which added up to a decent profit line.  Paperwork was minimal and, because they had established relationships with their customers, the risk remained relatively low.

Today, the need for these loans is just as common if not greater than before. The landscape has changed dramatically following the introduction of the Dodd-Frank Wall Street Reform and Consumer Protection Act  after one of our nation’s biggest financial crises. Small loans from a community bank now require pages and pages of onerous loan documents and the time involved for the banks to comply with new regulations make the practicability of these offers not worth the risk.  In response, the short term lending market has changed with an increase in higher risk payday loan, title loan, and cash advance lenders.  This has now grown into a $46 billion industry.

With a mandate from Dodd-Frank, the Consumer Financial Protection Bureau (CFPB) has responded to this market with a proposed rule to more clearly define terms, limits, and lending practices to help protect consumers.  While there are concerns expressed by both regulators and industry, the importance of knowing how this impacts consumers and lenders is vital.

The CFPB’s proposed ruling is “aimed at ending payday debt traps”.  Essentially the CFPB proposes to implement regulations that help ensure consumers have the ability to repay their loans and don’t fall into a cycle of re-borrowing at very high interest rates without the ability to ever repay the original loan.  At the CFPB field hearing in Kansas City on June 2, 2016, proponents of the ruling argued that all short term loans are designed to keep borrowers in this never-ending repayment cycle.  However, the industry pointed to supporting data to demonstrate that not only was short term lending essential, but only a small percentage of their customers fall into that cycle.

Well before the CFPB released its proposed rule, industry leaders began executing self-regulation efforts to protect consumers.  Advocacy organizations such as the Online Lenders Alliance (OLA) and the Community Financial Services Association of America (CFSA) formed to establish best practices, eliminate deceptive marketing and advertising, and work closely with regulators and legislators to provide quality products and services to their consumers.

What does this mean moving forward and finding new customers in this space?  The backbone to acquiring new customers has been through the use of lead generators and affiliate marketers.  These are companies that advertise products for a lender, gather potential customer information and then sell the lead to a lender.  As one strategy to advertise services to a wide audience, this can lead to one of two results:

1. Generate a large volume of customers and provide legitimate leads on a potential borrower.
2. Unscrupulous companies may use one particular company brand to drive traffic to another company.

In the second case, a customer is deceived into thinking he or she is submitting a request to a particular lender, yet the information never reaches that lender and other companies are provided the lead data instead.

The proposed CFPB rule will undoubtedly place additional restrictions and regulations on this industry, from requiring limits on advertising claims to narrowing the channels available to promote products and services. To sustain and grow the short term lending industry, brands must provide customers a truthful and honest shopping experience that delivers loans to the borrower as intended. As a result, the importance of protecting ones brand from misuse and using technology to remove unwanted and false instances of their brand will be paramount.

Information on the full CFPB proposed ruling can be found here:

http://files.consumerfinance.gov/f/documents/CFPB_Proposes_Rule_End_Payday_Debt_Traps.pdf

Online Lenders Alliance:

http://onlinelendersalliance.org/

Community Financial Services Association of America:

http://cfsaa.com/