Payday lenders have been under significant scrutiny in recent years about exorbitant loan interest rates and creating cycle of dependency for its customers. Payday loans and other questionable lending practices among various institutions was a primary driver for the creation of the Consumer Financial Protection Bureau. Payday lenders however are trying to stay one step ahead.
Many of the nations top lenders for payday loans including Cash America International Inc. and Advance America Cash Advance Centers Inc. are taking steps now to limit the CFPB's oversight. The expectation is that tighter regulations will be imposed on short term loans so a shift is underway to installment loans with longer durations and scheduled payments.
Payday loans are normally for amounts as low as $100 with a duration of a few weeks or until the borrower's next paycheck. When fees are included, interest rates on payday loans can be as much as 500%. Installment loans have a fixed payment plan which last anywhere from three months to one year. Requirements are also stricter for installment loans including income verification and credit checks.
Jeremy Rosenblum, an attorney with Ballard Spahr LLP in Philadelphia, in a Bloomberg interview states that he "cautions his clients that moving into installment loans may not protect them from federal rules. In its guidelines for examining payday lenders, the bureau didn't explicitly define a payday loan, and could still decide to oversee to installment products."
Government oversight and enforcement are still a possibility regardless of loan length. "If small-dollar lenders are engaged in unfair, deceptive or abusive practices, the bureau will hold those institutions accountable, no matter how their products are structured," CFPB spokeswoman Moira Vahey told Bloomberg.