Advocates continue to think about how payday lending can be addressed through rule-making at the CFPB and through legislation at the state level. Two ideas seem worth mentioning.
Defining the length of a payday loan: Statutes usually have a hard time defining when payday loans end and
when consumer finance installment loans begin. Illinois drew the line at 180 days. Some have proposed a term definition of as little as 31 days, and that is already the case in many states. In some places, it is fourteen days. The maximum length tends to matter. Often, loan terms end up being one more day than the maximum.
Addressing the Rule of 78ths: One consumer installment lender employs the Rule of 78ths in keeping the books on its loans. The rule of 78ths is pretty old school and save for World Acceptance and its subsidiaries, it is virtually non-existent. Nonetheless, it is out there. In the rule of 78ths, interest payments are concentrated upfront and principal payments are pushed back to the end. True, all loans tend to have that feature, but not to the extent of the rule of 78ths. The impact is to increase the effective interest rate paid over the life of the loan. This could be an element within a larger agenda on abusive prepayment penalty practices.
Ability to repay: What if Director Cordray's idea to implement some kind of ability-to-repay standard became reality? In that scenario, borrowers would have to demonstrate that they had enough income to pay back their debts. There would likely be a test for that capacity using their income at the moment of origination and possibly also for in the future.
Thinking more about rollovers: Legislation in some states limit the number of loans that any consumer can take out in a year. Accomplishing that is easier said than done. Generally, the process has to involve a registry in order to have teeth and it has to be done in tandem with some kind of testing and enforcement. One of the takeaways from the Illinois experience (and also from Washington) is that it makes a big difference. The repeat users are the best customers. It takes a while to make up for the high rate of defaults.
There are a number of readers here from the payday lending industry. Want to weigh in?
also in other states