Why Payday Advance Is Not Predatory Lending

The term “predatory lending” has received a lot of attention recently; but often its definition is unclear and the distinction between predatory lending and subprime lending is blurred. This vagueness of the term has been used to portray certain financial services inaccurately. Payday advance has been the target of just such an attempt, and it is clearly unwarranted.

In general, predatory lending is defined as a harmful form of subprime lending in which consumers are pressured to take loans they don’t need, putting valuable assets at risk. Federal Reserve Governor Edward Gramlich said in an address to the Texas Association of Bank Counsel in South Padre Island, Texas, October 9, 2003 that predatory lending typically involves at least one, and perhaps all three, of the elements listed below. Not one of these elements applies to payday advance and here’s why.

Three Elements of Predatory Lending, according to Federal Reserve Governor Gramlich	Why Payday Advance is NOT Predatory Lending
Making unaffordable loans based on the assets of the borrower rather than on the borrower’s ability to repay an obligation.	Payday advance is a small denomination, un-collateralized, unsecured short-term financial transaction based on the borrower’s steady income.
Inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced (“loan flipping”).	Most state laws prohibit the extension of a payday advance by paying an additional fee (rollover). CFSA members do not encourage rollovers and, in states where rollovers are permitted, limit them to 4 or the state limit, whichever is less.
Engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower.	The cost of a payday advance is fully disclosed to customers on signage and in disclosure agreements. It is a one-time, flat fee and there are no hidden charges, balloon payments or accruing interest. CFSA members also provide an educational brochure emphasizing responsible use of the product and offer a free right of rescission should the customer change his mind.

Payday advances are small, short-term cash advances with simple terms and fees. Thirty-seven states and the District of Columbia have laws and/or regulations governing this product. The industry is dedicated to working with interested parties to ensure that consumers use the service appropriately. Members of the Community Financial Services Association of America (CFSA), the national trade association of payday advance, believe that payday lending should be conducted in a safe and responsible manner and with appropriate disclosures and strong consumer protections. CFSA’s Best Practices, which apply to all CFSA members, are intended to ensure such conduct. CFSA members must abide by the following Best Practices:

• A 24-hour, cost-free customer right to rescind any transaction.
• Prohibition of or limitation on rollovers.
• Full disclosure of transaction terms.
• Encourage responsible use of the service.
• Appropriate collection practices.
• No criminal action against customers.
• Compliance with state and federal regulations.
• Truthful advertising.
• Enforcement of Best Practices.