Payday lenders prepare for less risky post-pandemic borrowing
Payday lenders who have become unwitting victims of the pandemic are anxiously awaiting the end of most government assistance programs, but those who follow the industry say some high-cost loans may never fully bounce back.
The passage by Congress in the past 18 months of improved unemployment benefits, federal stimulus payments, a moratorium on evictions, and student loan and mortgage forbearance has reduced the need for credit at high cost. In fact, the number of payday loans has dropped by more than 50% in some states.
But most federal government supports are expected to expire in the coming months or, as in the case of improved unemployment benefits in some Republican-led states, have already ended. This has raised hope within the industry and concern from consumer advocates that high-cost lenders could see their volumes increase again in 2021 and 2022.
But the story is more complicated, in part because Americans used so much of their stimulus dollars to pay down debt, in part because a generous monthly child tax credit could stick around indefinitely, and in part because regulatory control is likely to tighten under the Biden administration. .
“Everyone wants to get back to normal,” said Dana Sweeney, organizer at the Alabama Appleseed Center for Law and Justice, an advocacy group. “But nobody wants to go back to loans that have an APR of 456%.”
Payday lenders say they are bracing for a shift in customer preferences, noting that small dollar loan volumes have generally been declining since 2019.
“If there is less demand from customers, we will look to determine what our customers’ needs are, however we can meet them,” said Ed D’Alessio, executive director of the INFIN Alliance , a group in the financial services industry.
The business of traditional payday lenders, known to offer 400% annual percentage rates on loans, high fees and two-week payment plans, was on the decline nationwide. But the pandemic has pushed these trends to excess.
Payday loans in Alabama, Indiana, Michigan, North Dakota, Washington, Kentucky and Wisconsin fell in 2020 to between 40% and 60% of 2019 levels, with the lowest points coinciding with the distribution of federal direct stimulus payments , according to Veritec Solutions, a data provider that collects information from state regulators.
And the California Department of Financial Protection and Innovation reported a 40% drop in payday loans issued in 2020 from 2019 levels and a 30% drop in the number of payday clients.
“Perhaps there is a migration to longer-term payout products, as opposed to shorter-term single payment products,” said D’Alessio, who noted that alliance members have seen only declines in their payday and short-term loan products. “We still had good check-cashing and rebate volumes, which people came to our stores to do.”
But even online, high-cost installment lenders haven’t necessarily seen a significant increase in business during the pandemic. Two of the largest online lenders, Elevate Credit and Enova International, reported an increase in profits in 2020, but not loan growth.
Instead, both companies reported a significant drop in write-offs, meaning they suffered fewer losses on their outstanding loans.
“These two stories correspond to the fact that people have more money,” said Alex Horowitz, senior director of the Pew Charitable Trusts Consumer Finance Project.
More money, less loans
Not only has the government provided direct economic relief – data from Veritec showed the biggest drop in in-store payday loans when stimulus checks hit people’s bank accounts in March, April and December 2020, as well as in March and April 2021 – but many regular payments have been suspended.
Homeowners who had difficulty paying their mortgages could apply for forbearance; student loans also had a opt-out option. A moratorium on evictions was in place at the federal level as well as in many states and municipalities.
The Federal Reserve Bank of New York reported in April that 37% of Americans planned to use stimulus payments to pay off debt, while an additional 37% saved that money.
But there are still concerns and the future is somewhat murky. Financial supports are ending, and with the delta variant of the coronavirus increasing in areas with low vaccination rates, opponents of high-cost lenders fear people will come back to them.
“People haven’t come back to where they belong,” said Sue Berkowitz, director of the South Carolina Appleseed Legal Justice Center.
That may not mean the industry is returning to where it was before the pandemic.
On the one hand, because many people have been able to increase their savings, they may not need to immediately return to high-cost lenders, said Jialan Wang, professor of finance at the University of the Illinois Gies College of Business.
Along with relief from the pandemic, the Biden administration and Congressional Democrats established an enhanced child tax credit that injects up to $ 300 per child into families’ bank accounts each month.
The credit is expected to expire at the end of the year, but President Joe Biden wants to continue it for at least the next five years, and Democrats are expected to push to expand the program in an upcoming budget reconciliation bill.
Since the most important times for payday loans are when the kids go back to school and just before Christmas, the child tax credit “could be something where households with children would certainly have lower demand.” for payday loans and other high-cost loans, said Gabriel Schulman, an analyst at IBISWorld.
Consumers are starting to have more options, including payroll access products that allow them to access some of their paychecks earlier, and an increase in small dollar loans from banks with lower rates. lower. But these new products have yet to come under strict regulatory control and are only starting now, he added.
The need for quick liquidity from high-cost lenders will remain, but not at the levels seen before the pandemic, Schulman said.
Stricter rules to come?
Another factor that could affect the rebound in high cost loans is increased regulatory oversight, both at the Consumer Financial Protection Bureau level and within states.
The CFPB said in March that it plans to reinvigorate its oversight and enforcement of the short-term and small dollar lending market, potentially including new rules.
Since 2016, South Dakota, Colorado, Nebraska and Illinois have instituted 36% interest rate caps on loans, and other states are considering such measures. On Capitol Hill, Democrats introduced legislation for a 36% federal rate cap, but that is unlikely to pass through Congress.
“I think you’re going to see a lot of effort in many states to prevent this type of loan from growing again,” Berkowitz said.