Compliance: Payday Lending Enters a New Frontier
Jamie Fulmer, vice president of public affairs for payday lender Advance America, says he welcomes the opportunity to work with the Consumer Financial Protection Bureau, because consistent disclosures would allow his product to be measured by the same metrics as competing short-term credit union loans.
While Fulmer admitted credit unions typically charge a lower annual percentage rate for their short-term credit products, he said the cooperatives often also charge application fees that drive up the total cost as high as, or even higher than what Advance America charges.
“It’s easy to criticize a product on its face, but this is where I think the bureau can help,” Fulmer said. “To make sure that you are comparing products on an apples-to-apples basis, because that’s where the real rubber meets the road. If our product is more expensive, the consumer ought to know that, but if we are being measured using different metrics, it’s misleading.”
Concerned that consumers in need of short-term financing were being denied by traditional financial institutions – including credit unions – the financial cooperatives began offering payday loans. At first, CUSOs like Credit Union Outreach Solutions Inc. introduced payday lending, providing expertise in the way of disclosures and underwriting standards, and in CUOSI’s case, setting up a fund to cover defaults. However, as payday lending has evolved into a mainstream product, more credit unions are choosing to provide their own in-house payday lending solutions; so much so, that CUOSI said it will discontinue operations next year.
Ultimately, Fulmer said consumers don’t care whether they’re being charged APR or fees; instead, they care about “how much they have to reach into their pocket to pay for one option over another.” Of course, that depends upon how many times the consumer reaches into his or her pocket. Bill Burke, president/CEO of the $260 million Day Air Credit Union, said his research has shown that if a borrower doesn’t turn over a payday loan, Fulmer’s claim may have some validity. Burke is chairman of CUOSI which offers payday alternative Stretch Pay loans with nearly 50 credit union partners.
“All of our analysis has shown that our financial model of Stretch Pay has resulted in incredible savings compared to a typical payday lender’s model based on $15 for every $100 borrowed, said the CEO of the Dayton, Ohio-based Day Air CU. “I can’t believe that a payday lender would have a financial model superior to that of credit unions from a cost of credit comparison.”
Burke also said the CFPB has its work cut out for it because it will be difficult to develop an apples-to-apples comparison for payday lending products due to the ability to roll over the loans.
Credit union lending options may be the best for many consumers but there cost or disclosures may not be as important. For example, a consumer may not want to fulfill a credit union’s membership requirement in order to gain access to a short term loan. Access to credit is another factor. Burke said he originally began developing Stretch Pay after attending a city council meeting in Dayton more than 10 years ago, when a council member was attempting to regulate payday lenders within city limits. Burke was shocked to hear so many people speak out in favor of payday lenders, saying they were their only source of credit.
“One person after another would say, ‘the payday lenders are all we have, because when we go to the bank, they put us through hoops and then turn us down anyway,’” Burke said.
A city council member asked the audience about credit unions, and Burke said he was shaken to hear that credit unions were also turning down those who needed short-term credit.
“I thought, ‘gosh what can we do, because I didn’t like to hear that,’” Burke said. “What a horrible perception for credit unions, and that’s why we developed a payday lending alternative.”
Payday lenders are already regulated in most states, including the 29 states in which Advance America operates. State regulators perform audits and monitor business practices. Payday lenders are also subject to the same federal regulations that credit unions must comply with, like Truth in Lending disclosures, Fair Lending laws, and regulations that protect service members.
“I think there is a belief that somehow the regulated payday lending industry is not interested in operating in a regulatory environment,” Fulmer said. “But we think regulations provide protections for consumers that seek the short term credit we offer, and that’s good for consumers and the companies that are providing a safe product.”
Fulmer said he doesn’t know what kind of proposed regulations may come from CFPB, including whether or not the agency will conduct annual exams at payday lenders as most state regulators already do. Still, the bureau has engaged with payday lenders for the purposes of researching how the product relates to consumers and put out a supervisory manual.
“I haven’t heard of any specific action they are looking to move on,” Fulmer said, “I think if you listen to what they say, they have been very vocal in being clear that they’re not looking to be dictators in the market, not trying to pick winners and losers in the market, but they are interested in fostering an environment of helping consumers avoid tricks and traps.”
Despite the downturn of the economy, business at Advance America has remained relatively flat, Fulmer said. The payday lender extended $4 billion in credit last year to 1.5 million customers, which is consistent with the company’s last three years’ worth of business.
“We think our products compete favorably with all the options available to consumers for small denomination short term credit, and will remain a part of that mainstream for years to come,” Fulmer said.
Burke said the CUOSI board decided last year to disband because credit unions are now comfortable offering their own in-house payday lending solution.
“Our original purpose was to show credit unions it’s not that hard and there is a value proposition for the market.”