Online installment loans may soon face onerous obstacles from the bureau and other regulatory agencies. Over the last year, U.S. policymakers turned their regulatory eye toward the online lending industry. The Consumer Financial Protection Bureau, or CFPB, has released a set of proposals that will affect lenders regardless of their processing platform. Because of this, installment loans obtained online are in the crosshairs of regulatory overseers.
Burdensome Obstacles May Hinder Online Installment Loans
Bloomberg BNA reports that online marketplace lending is a developing sector of the financial services industry, one that takes advantage of the internet to process loans for consumers and small businesses. Like other lenders, companies that offer installment loans must comply with federal consumer financial protection laws such as the Equal Credit Opportunity Act, Truth in Lending Act and Fair Debt Collection Practices Act. These regulations are designed to protect borrowers, but for lenders of online installment loans, they can be burdensome obstacles.
Online Lending Creates a Problem for States
Pew Charitable Trusts reports that 14 states in addition to the District of Columbia have a ban in place against certain kinds of short-term lending like online installment loans. However, the availability of online lending has allowed lenders to bypass these restrictions. Some lenders have managed to stay in business by tweaking their business model toward installment loans. Because installment loans feature longer repayment terms, regulation against this type of lending has been minimal.
People are taking out more online installment loans than ever before. According to statistics, from 2006 to 2013, the revenue generated from online loans tripled from $1.4 billion to $4.1 billion. Despite the increase, problems exist in the industry. The stats show that nine out of every 10 complaints to the Better Business Bureau against the short-term loan industry involve online lending.
Problems of this magnitude are likely to bring about challenging obstacles to installment loan lenders as states and federal agencies enact tougher regulations in an attempt to resolve the issues.
Factors that are Raising Alarm Bells
Major growth in the online lending sector followed the most recent financial crisis. This expansion is causing some financial experts to question whether lenders have enough resources to stay in business if borrowers begin to default in record numbers, which is likely if another recession occurs.
The experts also point out that as these lenders become a main source of credit for consumers and small businesses, the bankruptcy of one or more of them could cause a general restriction of credit during a downturn, and this is a time when credit is often needed the most. If policymakers focus on the issue, they could enact an arduous obstacle for installment loan lenders, one that requires the industry to shore up its own financial resources.
Recommended Regulatory Action for the Installment Loan Industry
According to Green Touch, one problem that regulators have had in enacting rules against the installment loan industry is that different states have different rules in place. Common laws that feature strict and precise caps on the fees and finance charges that lenders are permitted to charge is one way that policymakers could overcome the problem involving different states.
The nation’s financial regulators could also bring about additional headaches for lenders by banning add-on products like insurance. In some cases, installment loan lenders sell insurance to borrowers. The insurance is tempting because it’s designed to protect a borrower when devastating financial circumstances arise. This may include a job loss, the death of a family member or a major illness. While the insurance may seem to protect a borrower, it’s really a safeguard for the lender.
Should States Void Illegal Loans?
States and federal regulators may decide to void illegal loans and financial agreements made between borrowers and unlicensed lenders. If they enact this law, it will put these businesses at a loss. Lenders stay in check when regulations in the lending industry exist. Not only will they stay in check, but laws also ensure that legitimate lenders are able to operate effectively.
Will Obstacles Prevent Online Installment Loans Availability for Consumers?
If regulators add too many obstacles that chip away at the profits of lenders offering online installment loans , then they may turn to other moneymaking avenues. Agencies like the CFPB are considering regulatory action that could put many lenders out of business. If they succeed, borrowers may have trouble gaining access to the funds that they need when financial emergencies surface. To read more about the potential obstacles that installment loan lenders are facing, head to the Personal Money Store.