March 26 marked a field hearing in Richmond, VA, held by the Consumer Financial Protection Bureau (CFPB) to weigh regulations governing the short-term credit marketplace. They are eyeing credit options that include payday loans, installment loans, auto title loans, lines of credit and prepaid cards.
CFPB Director Richard Cordray had this to say, prefacing the hearing:
"Consumer credit is a relatively modern phenomenon, which grew up with the rise of the money economy itself and developed initially as a means of enabling consumers to make a purchase. At one time, that purchase might have been dry goods from the communityߣs general store; today, it could be a home or an automobile. The advantage of consumer credit is that it lets people spread the cost of repayment over time. Until recently, a bedrock principle of all consumer lending was that before a loan was made, the lender would first assess the borrowerߣs capacity to repay the loan. In a healthy credit market, both the borrower and the lender succeed when the transaction succeeds – the borrower meets his or her need and the lender gets repaid."
The CFPB indicates that they understand Americans choose all types of financial services based on affordability, flexibility and accessibility, including loans from traditional banks, consumer lenders, high-tech startups and big-box retailers. Cordray details worst-case payday loan scenarios of consumers who fold under strict repayment schedules, amass overdraft fees and find themselves under a heavy debt blanket. He goes on to say:
"We recognize that consumers have a legitimate need to access credit to meet their particular circumstances. But consumers need credit that helps them, not harms them. If the lenderߣs success depends on the borrower failing, market dynamics are not functioning properly. In these cases, the proper balance between lenders and borrowers is knocked off course and the “win-win” dynamic of healthy credit markets is no longer achieved. That is why we are holding this field hearing, so that we can begin to gain feedback on our approach to these issues."
Blogger Patrick O'Shaughnessy of The Hill advocates that regulations must "strive to protect Americans' ability to access a variety of credit options, protect them from unscrupulous, unregulated lenders, and enable them to make informed financial decisions." He cites statistics from a Harris Interactive national survey that indicates consumers who borrowed from a regulated storefront payday lender found that 98 percent were satisfied or very satisfied with their experience. Further, lenders and regulators see very low complaints, with less than one percent of the CFPB complaints pertaining to payday loans.
As the CFPB considers the issue, eyes on the consumer credit and small business alternative lending industries will be watching to see what new regulations, if any, may come from these hearings.
Options for financing have grown exponentially to meet the borrowing needs of individuals and small businesses. As always, the market dynamics drives the availability of financial products and services available to the marketplace.
Has your small business struggled with traditional lending options?