US Payday Lenders Face Similar Situation to UK Counterparts Who are Exiting Market in Droves
In the United Kingdom (UK), about half of all payday lenders have exited the marketplace over the past year and a half in response to intense public scrutiny and in anticipation of stricter regulations under the Financial Conduct Authority (FCA). Meanwhile, in the United States (US), payday lenders are facing a similarly challenging environment as oversight and criticism of the short-term lending industry heats up.
On May 22, 2014, the Consumer Financial Protection Bureau (CFPB) published its Supervision Report highlighting the risky and illegal practices encountered over the agency’s past six months of oversight throughout the financial services industry. In the report, payday lending was identified as one of the top three areas of concern. Specifically, the CFPB found that many payday lenders intentionally deceived and harassed borrowers and/or hired third-party debt collectors to conduct these activities, all in violation of federal consumer laws.
In response to the “systemic flaws” uncovered in the payday lending marketplace, the CFPB appears to be considering issuing new rules to govern short-term lending. In the CFPB’s Spring 2014 rulemaking agenda, the agency stated, “We’re researching and considering whether rulemaking is warranted in the [payday lending] area.” Given the findings of the Supervision Report as well as the results of another research report released by the agency in late March, payday lenders should realistically anticipate new regulations to govern their industry.
In the US, payday lenders also face state laws and regulations restricting the industry. Nine states regulate certain aspects of payday loans including fees, renewals and repayment periods, and 15 states completely prohibit storefront payday lending.
Given the dramatic response seen in the UK, it will be interesting to see how US payday lenders react to a similarly stringent regulatory environment. If the US experienced an exodus of half of its payday lenders the results could be far more severe than in the UK. In the US, payday lenders originate an average of $27 billion in loans each year, with the average loan size not even reaching $400. It is estimated that more than 12 million American consumers take out a payday loan annually. Conversely, the payday loan industry in the UK is only estimated to originate £ 2 billion annually.
- CFPB Press Release on Supervision Report – http://www.consumerfinance.gov/newsroom/cfpb-supervision-report-highlights-risky-practices-in-nonbank-markets/
- CFPB Spring 2014 Supervisory Highlights Report – http://files.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf
- CFPB Spring 2014 Rulemaking Agenda – http://www.consumerfinance.gov/blog/category/payday-loans/
- Pew Charitable Trust Study on State Regulation of Payday Lending – http://www.pewstates.org/research/data-visualizations/state-payday-loan-regulation-and-usage-rates-85899405695
- CFPB Report on Payday Lending – http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf
- Center for Responsible Lending Fact Sheet on Payday Lending –
- House of Commons Report on Payday Lending – http://www.publications.parliament.uk/pa/cm201314/cmselect/cmbis/789/789.pdf