Few areas of the financial services sector are growing. Aside from payday lending, that is. This financing has become much more popular since the economic recession restricted traditional lending.
However, the joy may be short-lived because the Consumer Financial Protection Bureau (CFPB) has begun to scrutinize these operations.
Richard Cordray, the recently appointed bureau director, chaired a payday lending hearing in Birmingham, Alabama, last week. The number of payday lenders in Birmingham, estimated at 93, led its City Council to impose a six-month moratorium on the opening of new establishments.
Mr. Cordray has been very busy, with the bureau recently publishing guidelines for determining whether payday lenders are in compliance with consumer finance laws.
Edward Mills, an analyst with FBR Capital Markets, attended the recent hearing and said “regulation is coming.” He believes that the CFPB wants to take meaningful consumer actions and payday lending reform is the “low-hanging fruit.”
Most states already impose limits on loan amounts, fees, and interest rates. Approximately 17 states have effectively or completely banned payday loans via strict limits.
These loans are easy to get, requiring only a source of income and a bank account. Lenders do not check credit scores but they do verify that the applicant has not previously defaulted on a payday loan.
Borrowers must repay the loan plus interest and fees by the next paycheck. When the loan is taken, the borrower gives a check to the lender, which can be cashed if the individual does not repay the loan.
Some payday lenders, like Advance America, offer an extended repayment term, converting the loan into installment financing.
The balance can be repaid over the next four paychecks without additional interest or fees accruing. Though payday loans have high interest rates, lenders say the charges are less than for overdrafts, bounced checks, and late fees on rent.
