Don’t Be Fooled … All Lenders Are Not the Same

The Center for Responsible Lending (CRL) is out with a new report that is a lot like its other reports on consumer credit and predatory lenders. But this time, there’s a twist.

Rather than focusing on the unhelpful fallout of state-based interest-rate caps on small dollar consumer loans or the rise of predatory online lenders, CRL lumps Traditional Installment Lenders (TILs) and other non-payday and non-car-title lenders into a category identified as “high-cost installment lenders.”

By deceptively lumping all forms of installment lenders under one umbrella, CRL creates confusion both for policymakers and consumers. CRL claims the forms of installment loans they highlight “share similar characteristics with other payday and car-title loans: a lack of underwriting; access to a borrower’s bank account or car as security; structures that make it difficult for borrowers to make progress repaying; excessive rates and fees; and a tendency toward loan-flipping or stressed re-borrowing.”

For TILs, this simply is not the case. The vast majority of AFSA member companies that offer plain vanilla, small-dollar TILs bear no resemblance to the lenders CRL describes. Our members underwrite and evaluate customers’ ability to pay; they do not require access to customers’ bank accounts; terms are clear, with standard monthly payments, no hidden fees, no balloon payments or penalties for early repayment, and report to credit bureaus.

To be sure, the consumer lending space is becoming more diverse, particularly with the growth in online lenders. But rather than differentiating the true predatory lenders and educating consumers about the differences among loan products, CRL irresponsibly puts everyone in the same pool.

CRL claims that “little research exists regarding the impact of high-cost installment loans on consumers’ financial health.” But there is plenty of research on consumer credit, the effects of predatory lending on consumers’ financial standing, and the benefits of responsible small dollar lending for consumers, particularly those with subprime credit scores. There is also plenty of research on CRL’s fallback policy of imposing interest rate caps to protect consumers. There is plenty of research that such policies are unworkable for responsible, small dollar lending, and hinder consumer access to credit – particularly for those with nonprime credit scores (credit score below 670) or little or no credit history:

The National Commission on Consumer Finance study confirmed it. The Consumer Financial Protection Bureau Task Force on Federal Consumer Financial Law report confirmed it.

A Federal Reserve study on interest rate caps confirmed that reputable lenders cannot afford to offer a small dollar loan capped at 36% interest without taking a loss, and that the costs for such loans require a minimum loan amount of about $2500, when most consumers are seeking amounts considerably less than that.

The Financial Health Network (FHN) found that rate caps reduce consumers’ credit options. FHN estimated that more than a quarter of U.S. consumers do not have “prime” or excellent credit, and when the reputable lenders stop offering consumer credit products to customers with less than perfect credit those consumers are left with few options beyond the predatory lenders policymakers claim to want to take out of the market.

Finally, earlier this year, the Congressional Black Caucus Foundation annual report highlighted the importance a financial marketplace that allows Americans to access small-dollar credit. Most notably, the report stated that “proposals to protect consumers from predatory practices through a 36% rate cap would cause more harm than help by limiting consumer access to credit.”

AFSA and its members have a long history of advocating responsible policies that protect consumers and their access to credit when they need it. Those two goals, which we know CRL shares, are not and should not be mutually exclusive. But releasing a report that appears intended to confuse policymakers, while pushing old, failed policy proposals is not the way to achieve those worthy goals on behalf of consumers.