Bureau Publishes Payday Loan Examination Procedures; Hosts First Field Hearing

January 19, 2012 Source: CFPB

WASHINGTON, D.C. – In Birmingham, Ala. today, the Consumer Financial Protection Bureau (CFPB) is convening the agency’s first-ever field hearing to gather information and input on the payday lending market. The hearing coincides with the publication of the Bureau’s Short-Term, Small-Dollar Lending Procedures – a field guide CFPB examiners will use to make sure payday lenders – banks and non-banks – are following federal consumer financial laws.

“We recognize the need for emergency credit. At the same time, it is important that these products actually help consumers, rather than harm them,” said CFPB Director Richard Cordray in his opening remarks at today’s field hearing. “Now, the Bureau will be giving payday lenders much more attention.”

The Short-Term, Small-Dollar Lending Procedures can be found here.

Payday loans are typically marketed to bridge a cash flow shortage between pay or benefits checks. They generally have three features: the loans are small dollar amounts; borrowers must repay the loan quickly; and they require that a borrower give lenders access to repayment through a claim on the borrower’s deposit account.

Most loans are for several hundred dollars and have finance charges of $15 or $20 for each $100 borrowed. For the two-week term typical of a payday loan, these fees equate to an Annual Percentage Rate ranging from 391 percent to 521 percent. Loan amounts and finance charges vary depending on state law. If the consumer does not repay the loan in full by the due date, the loan agreement typically permits the lender to cash the consumer’s check to obtain repayment.

Payday lenders have sprung up across the country over the past 20 years, beginning in storefront locations. With the advent of new media, payday loans now are offered through the Internet. Most recently, some banks began offering similar loan products.

With the establishment of the CFPB, a federal agency for the first time can supervise not only bank payday lenders but also all non-bank payday lenders. Specifically, the Short-Term, Small Dollar Lending Procedures describe the types of information that the agency’s examiners will gather to evaluate payday lenders’ policies and procedures, assess whether lenders are in compliance with federal consumer financial laws, and identify risks to consumers throughout the lending process. The procedures track key payday lending activities, from initial advertisements and marketing to collection practices.

The CFPB will be implementing its payday lending supervision program based on its assessment of risks to consumers, including consideration of factors such as the volume of business and the extent of state oversight. The CFPB also will be coordinating with federal and state partners to maximize supervisory capability and minimize regulatory burden. If a violation of a federal consumer financial law has occurred, the CFPB will determine whether supervisory or enforcement actions are appropriate.

In general, CFPB supervision will include gathering reports from and conducting examinations of bank and non-bank activities. The examination process will begin with scoping, review of information, and data analysis followed by onsite examinations. The CFPB will be in regular communication with supervised entities, and it will conduct follow-up monitoring.

Commercial lenders specialize in hard money and bridge loans, often those that close quickly, in as little as two weeks. The commercial loan industry is most often accessed through agents or brokers. Brokers and/or sales agents provide an evaluation of a borrower and then recommend the loan to a number of different commercial lenders for whom they feel will be most likely to fund the borrower’s request.

The real king pins of the industry controlling the flow are the processors. Going through a broker or agent rather than directly through a lender may cause longer wait times for loan financing and the risk of more up-front fees; However, brokers or agents can greatly facilitate the lending process. Often these individuals come up with innovative and unique ways to overcome obstacles that the borrower may not be able to figure out on their own.

Commercial lenders weigh the type, quality, and equity of the hard collateral very heavily. Which will provide the borrower with the greatest flexibility, but at the same time bring the highest rates when compared with traditional bank loans.

Many commercial loans are bridge loans where a higher rate is a good trade off for the speed with which the loan is delivered and the flexibility of the finance terms behind it; however, most commercial loans never come to be since the average business owner wanting a first time loan can easily get a second on their personal assets.

Thanks to freedom from regulation, the commercial lending industry operates with particular speed and responsiveness, making it an attractive option for commercial businesses seeking quick funding; However, the speed and efficiency has also created a highly predatory lending environment where many companies refer loans to one another (brokering), increasing the price and loan points with each referral.

There is also large concern about the practices of some lending companies in the industry who require upfront payments to initiate loans and refuse to lend on virtually all properties while keeping this fee. Borrowers are advised not to work with hard money lenders who require ANY upfront fees prior to funding in order to reduce the risk. Anyone asking for money from you in order to lend to you is 10 times out of 10 a scam.

In recent years there have been some significant changes in commercial lending. A good example is with the credit unions. Credit Unions are now allowed to engage in commercial lending with only minor restrictions. Credit unions are prohibited in most cases from lending more than 80% of the value of real property. Due to the need to protect credit union members from excessive risk. Which is a common practice in the industry as a whole, although not enforced. On the other hand, credit unions are cooperatives and can therefore offer competitive advantages over other institutions in regards to rate and other terms.

Progressive commercial lenders prefer to offer terms for shorter periods of time than traditional residential lenders which lend at fifteen to thirty year terms. Commercial lenders sometimes offer a five or ten year loan with a payout based on longer, thereby leaving a balloon payment due at the loan expiration. Which often requires the property owner to come up with the balloon payment himself, or to refinance or sell.

Additionally a commercial lender might attempt to charge a prepayment penalty in order to guarantee a certain return (some states this in not enforceable as is the case in most states), in the event the loan is not kept for the full term. Frequently prepayment penalties range between one and five years. Penalties are for an amount of interest or number of months such as the frequently will be seen in a six month interest guarantee or there is a early payoff.

If you have questions about lending practices the National Lending Center encourages you to contact your local governing agencies or banking commissioners office.

Government Loans backed by the U.S. Small Business Administration are up thirty percent to ninety percent recently in the many areas within the United States when compared with last year, when new loans… well were just not getting approved. Business people also say they are noticing more banks and “commercial finance” companies lending lately, although it’s just anecdotal evidence.

Some restaurant owners are sub-coming to the onslaught of phone calls during lunch hour for factoring loans or private investors. While other companies are turning to the SBA. Some franchisees have tapped into SBA loans for some of the $500,000 start-up cost of opening a restaurant or any store.

SBA loans are being used as part of the standard up-sell feature that is offered to the prospective franchisees in today’s market.

Even if the country is doing a double flip out of recession, it is hard to spot a comeback in government or commercial lending from official statistics.

Near fifty percent of the businesses that had sought loans last year in recent months got most or all of the credit they needed. It was down from the same survey in December of 2009, when about sixty percent were able to get most or all the credit they needed.

The facts could mean lending has deteriorated, but a Federal Reserve researcher said many other factors could have caused the sliding decrease, including differences in the businesses applying for credit.

Big and small banks want to lend money, but many are not able due to they have to reserve so much money for potential loan losses. We all know the will not be any more insurance policies to cover extra risk due to the bill for it lapsed and consumers flipped the bill in the form of bail outs.

The asset-based lenders or affectionately called commercial finance companies, usually charge higher interest rates and require businesses to put up their equipment, inventory, and/or accounts receivable as collateral.

In the past asset-based lenders cut the amount of credit they’ve extended; however, in first quarter of 2001 the lenders pushed harder than ever to put money on the street. The businesses do not seem to want as many loans as they have taken out in the past years before the economy melt down.

With lending still pretty tight, more people are turning to the federal government.

In past years, a number of businesses were approved without getting a government guarantee. Now, lenders are sending the same loans moved to underwriting get the government guarantee as if it was a standard practice.

In the second quarter of 2008 (before the credit crunch struck) the SBA guaranteed millions through out the United states. Which plummeted by half in 2009, but has since rebounded to eighty percent first quarter of this year.

Some of the SBA’s momentum could peter out in the business quarters to come. Federal stimulus money allowed the SBA to guarantee up to ninety percent of a loan value, making loans more attractive to banks and traditional lenders alike. The money has since run out. The SBA will keep guaranteeing loans, but not at the same high level unless Congress will provide more money.

Most local business people are seeing some banks a little more willing to work with businesses lately and seem to be hiring some new loan officers.

While the traditional methods like the Yellow pages have seen renewal orders drop by lenders in their national books . . . the promotional product companies like Target Line are getting a few more solicitations from lenders lately, which could be a good sign. Lenders offline promotions had disappeared for months on 2010.

The small business community is not going to see some overnight miracle; however, with the right amount of patience and good research on federal stimulus help… there will be a steady increase in the lending industry to all small business owners.

Consumer lending does not include mortgage loans, typically used for home purchases, which follow a very different kinds of regulations than do the consumer loans.

Consumer loans are different from commercial loans in which can be calculated on a daily basis, rather than 12 monthly payments (such as with the U.S. Federal calendar), and include interest for leap day (as an extra day of the year), such as in Actual/366 loan calculations.

The National Lending Center advises consumers read contracts with lenders thoroughly and if needed . . . seek professional legal counsel before applying or obtaining any advance or type of loan.