This morning the CFPB announced that it’s considering a series of proposals focused on payday loans and other credit products ranging from vehicle title loans to open-end lines of credit. In particular, the CFPB aims to minimize the mismatch between customers’ “ability-to-pay” and lenders’ timeframes and rates. Moreover, too many payday lending customers are stuck in a long-term “debt trap” with continually increasing payments as they rollover short-term debt over a long-term period.
Across short-term (up to 45 days) and long-term (greater than 45 days) loans, the CFPB is proposing additional requirements to verify consumer income, major financial obligations, and borrowing history. Overall, these requirements force short-term and long-term lenders to better understand their customers’ “ability-to-pay.” The proposed requirements are also combined with principal caps, rate caps, and contingency strategies to prevent debt traps.
We’re excited about these proposals, because they remove a fog of uncertainty from the market, and give lenders a framework to innovate. Payday lenders provide an underserved segment of the population with financial services — this makes them easy targets for criticism. However, the risk officers and underwriting officers at short-term lenders that we work with are truly seeking what’s right for their customers and have sophisticated systems to provide loans based on customer affordability. They charge high rates because there are high fraud rates and truly unpredictable risk. The aim of payday lenders should be to limit risk and maximize customer satisfaction, as this will maximize their profitability as well.
The DemystData team is in agreement with the CFPB — there is frequently a mismatch between “ability-to-pay” and the types of products customers are purchasing from payday lenders, despite the best efforts of these lenders. Having consulted with many short-term lenders, we see the solution in one word — “Data.” Indeed, that’s just what the CFPB is proposing in the context of additional financial verification. But we wouldn’t stop there.
Payday lenders may integrate data focused on purchasing history, employment history, and e-mail activity, among other types. They may also generate character profiles separate from credit data that identify candidates’ probabilistic behavior. These character profiles will provide a much stronger indicator of fraudulent activity, drive down pricing in aggregate through better product allocation across the risk pool, and enable more underserved customers to access financial services.
It’s nonsense to assume that lenders lend not expecting repayment. Current behaviors only persist due to insufficient customer data that drives poor differentiation between good and bad customers. The better lenders know their customers, the more they can offer the right product, at the right price, and help customers up the ladder of responsibility.
Over the last few years regulatory uncertainty around data has held back some of the most well-intentioned lenders. We’ve seen this firsthand in our experiences with some of the biggest bank and non-bank lenders. CFPB uncertainty hangs like the “Sword of Damocles” above compliance officers when they make decisions about which data to leverage, which in turn impedes the integration of new systems of decision rules throughout the market.
Now that the rules may become clearer, we anticipate a new wave of innovation. Banks beware; the highly sophisticated lending market has the best borrowers in their sights.
We welcome your thoughts, questions, and general comments on this recent development or data in the consumer lending sector overall. Please free to comment at firstname.lastname@example.org.
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