Woodkirk Stone
Payday lenders who have become unwitting victims of the pandemic are anxiously awaiting the end of most government relief programs, but those who follow the industry say some high-cost loans may never fully rebound.
Congress’ passage in the past 18 months of enhanced 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 aid is due to expire in the coming months or, as in the case of enhanced unemployment benefits in some Republican-led states, has already ended. This has raised hopes within the industry and concern among consumer advocates that high-cost lenders could see their volumes increase again in 2021 and 2022.
But the story is more complicated, partly because Americans have used so much of their stimulus dollars to pay down debt, partly because a generous monthly child tax credit could stay indefinitely, and partly because regulatory scrutiny is likely to tighten under the Biden administration. .
“Everyone wants to get back to normal,” said Dana Sweeney, an organizer at the Alabama Appleseed Center for Law and Justice, an advocacy group. “But no one wants to go back to loans that have an APR of 456%.”
Turbocharged Trends
Payday lenders say they are bracing for a shift in customer preferences, noting that dollar loan volumes have been generally down since 2019.
“If there is less customer demand, we will look to see what our customers’ needs are, but we can meet them,” said Ed D’Alessio, executive director of the INFiN Alliance, an industry group. financial services.
Business for traditional payday lenders, known for offering 400% annual percentage rates on loans, high fees and two-week payment plans, was down nationwide. But the pandemic has pushed these trends into high gear.
Payday loans in Alabama, Indiana, Michigan, North Dakota, Washington, Kentucky and Wisconsin fell in 2020 between 40% and 60% of 2019 levels, 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 granted in 2020 compared to 2019 levels, and a 30% drop in payday customers.
“Perhaps there is a migration to longer-term installment products, as opposed to shorter-term one-time payment products,” said D’Alessio, who noted that members of the alliance only saw a decline in their payday loan products and other short-term loan products. “We still had good volumes around cashing checks and remittances, which people were coming to our stores to do.”
But even high-cost online installment lenders haven’t necessarily seen a significant increase in business during the pandemic. Two of the biggest online lenders, Elevate Credit and Enova International, reported increased profits in 2020, but not loan growth.
Instead, both companies reported significantly lower charges, meaning they suffered fewer losses on their outstanding loans.
“Both of these stories are consistent with people having more money,” said Alex Horowitz, senior manager 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 storefront 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 struggling to pay their mortgages were able to apply for forbearance; student loans also had a forbearance 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 plan to use stimulus payments to pay off debt, while another 37% are saving 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 rising in areas with low vaccination rates, opponents of high-cost lenders fear people will come back to them.
“People aren’t back where they need to be,” said Sue Berkowitz, director of the South Carolina Appleseed Legal Justice Center.
That may not mean the industry is going back to where it was before the pandemic hit.
On the one hand, since 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 Gies College of Business in India. University of Illinois.
Along with pandemic relief, the Biden administration and congressional Democrats have introduced an enhanced Child Tax Credit that injects up to $300 per child into families’ bank accounts each month.
The credit is due 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 extend the program in an upcoming budget reconciliation bill.
Considering the biggest payday loan periods are when children return to school and just before Christmas, the Child Tax Credit “could be something where households with children would definitely have a lower demand” for children. 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 portions of their paychecks sooner, and increased small-dollar lending at banks with rates lower. But these new products have yet to undergo strict regulatory review and are only beginning to take off, he added.
The need for quick cash 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 lending is increased regulatory scrutiny, both at the Consumer Financial Protection Bureau and within states.
The CFPB said in March that it planned to reinvigorate its oversight and enforcement of the short-term and small loan 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 Congress.
“I think you’re going to see a lot of effort in many states to prevent this type of lending from growing again,” Berkowitz said.