House Financial Services Committee Recap
On March 10th Rep. Farrington held an informational hearing on the deferred presentment industry (payday lending) in the state. Members of the industry, business groups, community organizations, and the DIFS (oversight over the industry) testified. Michigan Lending Facts wanted to share a few highlights from the hearing as well as clarifying some of the information presented.
There is a place for deferred presentment lending.
The hearing opened with some of the most interesting testimony from Patricia Herndon, Michigan Bankers Association – EVP, Government Relations. She pointed out that during her testimony that that MBA is generally neutral on deferred presentment lending but added that “there is a place for payday lending as a lender of last resort and that it is an important part of the ecosystem.”
Members of the deferred presentment industry also shared that by statute that all of their customers are already a member of a bank or credit union. While they may belong to one, they are not meeting their needs in large part due to low credit rating and that they are too high of risk to get a loan from these traditional lenders. They shared that the state regulated deferred presentment industry offers an option to consumers that are in need of credit but do not want to get a loan online or through an unregulated lender (sovereign tribal lenders).
Most customers are satisfied with industry.
Members of the industry testified that their customers are satisfied with the deferred presentment lending in the state and the industry receives very few complaints. This was reinforced when DIFS was asked about the number of complaints the industry generates and they shared the number of complaints is “relatively small in comparison to the nearly 6,000 complaints we get on all financial and insurance matters.”
Alternatives to deferred presentment
The deferred presentment industry shared that they welcome competition in the space and that is good to all parties involved. Options are important for consumers particularly those that have few to begin with due to credit issues. The challenge is that while some credit unions may offer alternatives, they are still for lower risk consumers and are not made readily available to those in need of them.
It was brought up that other lower cost programs are being developed including by Habitat for Humanity. They would like to set-up up their own lending operation but that solution has been slow to develop and is still not a viable alternative. They testified they are still awaiting a DFIS determination to be licensed as a small dollar, something they discussed last year and as far back as 2016. We hope they are successful but until they are, customers need access to credit to meet their needs today. They also appear to be reliant on subsidies and tax advantages to help with their product viability.
Another offering was from One Detroit Credit that has some products to help those with sub-prime customers with lower interest rates but they came with hefty fees. While they capped their interest at 18% APR, they charge a $70 fee for this type of loan.
On the other end of the scale you find unregulated lenders like sovereign tribal lenders, one headquartered in the state. These tribal lenders lend nationally to anyone looking for a loan around the country (not just tribe members). They charge 400% to 950% APR on their loans and offer few consumer protections and none of the protections under Michigan law.
The state regulated deferred presentment industry operates in the middle ground between non-profit/subsidized lenders and the unregulated marketplace. The deferred presentment industry challenge is that they are seeing a change in demand as consumers are looking for options for larger loans with a longer repayment term. The legislature can help these consumers by providing them with a well-regulated state option in the middle ground that allows for competition and innovation in the consumer credit marketplace.
36% cap questions
The issue of a 36% rate cap came up as a way to better regulate the deferred presentment industry but testimony provided showed that what it actually does is shut down the industry. At 36%, a $100 loan would only generate about $1.38 for the lender and no one would be able to stay in business at that low of a return. Consumers would be left with few options and forced to go to less savory lending options that will cost them more and offer few consumer protections.