The Customer Effect

With new CFPB rules, payday lending looks to new business models to survive

  • The CFPB's new payday lending rules will require payday lenders to assess a borrower's ability to pay.
  • The new rules put pressure on payday lenders to invest in underwriting technology, a financial burden that may push some toward longer-term installment loans and put others out of business.
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With new CFPB rules, payday lending looks to new business models to survive
Payday lenders, who will soon need to assess borrowers' ability to pay, are looking to different ways to reach customers seeking short-term loans. Their future may depend on the use of technology to evaluate borrowers, but it's a shift not all companies will be able to make. Under the new CFPB rules finalized last week, starting in 2019, lenders will need to determine whether the borrower can afford the loan payments and meet living costs and other financial obligations. The industry has come under fire from consumer advocates for trapping consumers into loans that roll over when they aren't able to pay. Requirements for payday loans vary by company. Most require proof of income and identification requirements but don't carry out a credit check or a detailed review of an borrower's ability to pay. As a result, the new rules may require lenders to invest more in tools to vet borrowers. "The rule puts a premium on technology for those who can afford it," said Dennis Shaul, CEO of the Community Financial Services Association of America, an industry lobby group. Shaul said he expects the industry to look to other products to fill the gap, such as installment loans, which allow for the principal to be paid back over a longer period. He added that some assessment of a customer's ability to pay will also be important. However, he said he disagrees with the CFPB's approach, opting for a more individualized evaluation of each borrower's financial circumstances. Others in the industry feel forcing payday lenders to procure underwriting technology is unfairly singling out the industry, particularly smaller, brick-and-mortar businesses. Jamie Fulmer, svp of public affairs at Advance America, one of the largest payday lenders in the U.S., said smaller companies may find it more difficult to adapt. "It will be an additional cost to any lender, particularly small businesses that will be required to to comply with rules and regulations," he said. "It will be the death knell in many ways for small businesses." Regardless of the push toward technology-driven business models, it's a direction the industry was already moving in, with the growth of online lenders Elevate and LendUp taking some of their business. Online lenders have the advantage of having developed machine-learning and artificial intelligence-based tools to evaluate borrowers. They also report to credit bureaus to help thin credit-file customers boost their credit scores. "There are two things going on -- there will be the response to the rule, which will impose on larger entities the need for [more] capital expenditures in technology, and apart from the rule itself, the way society is moving will cause more [short-term loan] customers to look to the internet," said Shaul. To one online lender that offers installment loans, the rules will benefit fintech lenders because of their technology-based tools to assess non-prime borrowers. "There are so many inherent problems [with payday lending]," said Ken Rees, CEO of Elevate, an online lender that focuses on non-prime borrowers. "What's going to come of this is the primary forms of credit originated to non-prime customers will move away from payday to longer-term forms of credit that have less negative consequences for consumers." To Rees, who said some payday lenders have approached Elevate asking whether it can take their customers, consolidation of the payday lending industry is a mostly likely follow-on effect of the new rules. "For the brick-and-mortar [payday lenders],  the challenge they’re going to face is requirements for real underwriting and sophisticated analytics that the payday lender is not used to," he said.  "We imagine that a large chunk of the industry will just give up." Photo credit: Wikimedia Commons

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