A recent story in the Wall Street Journal, which detailed decisions at the Consumer Financial Protection Bureau (CFPB) to review its rule for payday lenders and call off its investigation into a NILA member company, risked confusing readers by failing to make critical distinctions between types of lender (High-Interest Lenders Benefit from Trump’s Deregulatory Stance – Feb 1, 2018).
In an article predominantly focused on payday lenders, but which also discussed a CFPB decision to discontinue a lengthy, expensive and fruitless investigation, readers could be forgiven for thinking the company in question was itself a payday lender. In fact, it was a provider traditional installment loans. The distinction is important because installment lenders are not in any way affected by the payday rule under review, and are a form of credit that has been consistently praised by many, including former CFPB director, Richard Cordray.
The key difference between payday and installment loans is their structure. Payday loans carry “balloon payments” – the entirety of the loan plus interest and fees, due on a certain date. Many believe that this can cause borrowers to repeatedly refinance their loans when they cannot meet the payment. Installment loans, on the other hand, are repaid in regularly scheduled, manageable installments of principal and interest. Unlike payday lenders, installment lenders assess a borrower’s ability to repay a loan by calculating an income/expense budget to ensure that the borrower can make their payments out of their regular cash flow. They also report loan performance to credit bureaus, allowing responsible borrowers to build their credit; payday lenders do not.
A failure to differentiate between installment and payday loans in the media has long been a source of frustration for many who believe that, by providing a safe and affordable source of credit where payday loans are prohibited, traditional installment loans can help drive financial empowerment and mobility.
As Acting Director Mulvaney and the CFPB embark upon what we believe could be a more measured and honest approach to the regulation of small loans, we hope we can rely on them (and the press) to keep this in mind.