The Pew Charitable Trusts has released the third report in its “Payday Lending in America” series. The new report makes policy recommendations that are intended to apply to all small-dollar consumer cash loans (other than loans secured by a pledge or deposit of property) regardless of provider type (bank or nonbank) or loan type (payday, installment, or cash advance). The recommendations are based on the findings in Pew’s previous reports.

We found significant global weaknesses and flaws in Pew’s previous findings and do not believe they provide a compelling basis for regulatory intervention. Pew acknowledges: "In circumstances where people are using credit to pay other debts and obligations, it is unclear whether promoting more access to credit is, on net, beneficial as a way to manage expenses or harmful as another burden for people who are already struggling financially." Consequently, the policy recommendations in the latest report strike us as premature at best.

The new Pew recommendations are intended to address the supposed “problem of unaffordable small-dollar loans” in the 35 states that have lump-sum payday lending. Calling for “decisive action” from the Consumer Financial Protection Bureau, other federal regulators, and policymakers in those 35 states, Pew makes a number of key recommendations, drawing heavily on 2010 changes to Colorado’s payday lending law. These changes include the requirement that lenders allow borrowers at least six months to repay loans in installments. (Pew does not develop or cite any data about the consumer financial consequences of the Colorado legislation.)

According to Pew:

  • Required loan payments should be limited to installments that represent “an affordable percentage of a borrower’s periodic income.” Pew wants a loan to be presumed unaffordable, and prohibited as a result, if it requires payments of more than 5 percent of a borrower’s pretax income. A lender could overcome this presumption only by showing that a borrower had sufficient income to make required payments while meeting all other financial obligations without additional borrowing or using savings.

  • To discourage “flipping,” any fees allowed other than interest should be earned evenly over the loan term, all required payments should be substantially equal and amortize the loan to a zero balance over the loan term, and accounting methods that front-load interest, such as the “rule of 78s,” should be prohibited.

  • Deferred presentments (postdated checks and electronic debit authorizations) should be treated “as a dangerous form of loan collateral,” and deferred presentment loans should have a six-month maximum term and a $500 maximum loan amount. Again, Pew fails to explain why a payday loan that meets its 5 percent rule is more dangerous than a comparable loan without a postdated check or Automated Clearing House (ACH) authorization.

  • Regulators should make it easier for borrowers to cancel electronic payments.

  • The number of non-sufficient funds (NSF) fees a borrower can be charged for electronic payments should be limited.

  • Maximum loan terms and limits on allowable charges should be established. (Of course, Dodd-Frank explicitly prohibits the CFPB from establishing usury limits, so this recommendation is apparently for the states, which generally have established such limits for short-term loans.)

Ballard Spahr's Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com, or Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com.


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