Copyright 2014

If payday loans go away, what replaces them?

This proposal doesn’t tweak or reform an existing product. This is a complete overhaul of the industry, said Jamie Fuller, senior vice president of public affairs of Advance America, a payday lending chain.

What would replace payday lending is not an easy question to answer, but there are a few scenarios industry experts and consumer advocates expect could happen.

SAME BIRD, NEW FEATHERS: The simplest answer is the industry will survive, and keep doing what it is doing by changing the nature of the loans it provides.

Nick Bourke, a researcher at Pew who has spent more than five years looking at the payday lending industry, says the industry is already making adjustments in the wake of new regulations. When Colorado effectively banned traditional payday lending, the industry moved into high cost installment loans that are paid over a few months instead of all upfront in a few weeks.

There will be fewer two-week payday loans because of the CFPB rules, but the industry has already shifted to installment lending that is paid over several months. There will still be high interest rate payday loans on the market, Bourke said.

PAWNING: Another possible beneficiary may be pawnshops. A 2015 Cornell University study found that states that banned payday loans saw more activity at pawn shops and more checking accounts being closed involuntarily, possibility due to an increased amount of people over-drafting their accounts. But pawn shops are largely seen as a place for people to borrow who don’t have checking accounts.

BANKS TAKE OVER: Consumer advocates and the CFPB have been quite public in saying the best solution would be for traditional banks, which are highly regulated, to take over payday lending. Banks have plenty of locations, easy access to funds, and can make loans at much lower interest rates and still be profitable. But banks have been cool at best to the idea. Payday loans are seen as a risky and expensive. The costs for underwriting and processing them would eat into profits from the high interest rates they carry.

Most of our members are willing to do small dollar loans, but they are not very profitable. Application fees don’t cover the cost of doing the application and the processing and the credit check. There are just fixed costs that you just cannot get around, said Joe Gormley, assistant vice president and regulatory counsel at the Independent Community Bankers of America, a lobby group for small banks.

CREDIT UNIONS: There are already some experimental alternatives going on to replace payday loans.

One program run through credit unions is called the Payday Alternative Loan, where a customer can borrow between $200 to $1,000 at 28 percent interest and an application fee of $20. But interest in the program has been limited. The federal regulator for the PAL program estimates only 20 percent of credit unions provided such loans and loan originations were only $123.3 million last year, a drop in the bucket compared to the roughly $7 billion the mainstream payday lending industry did in the same year.

There’s also a program being tried in Atlanta, run by the credit agency Equifax and the National Federation of Community Development Credit Unions, that will provide payday loan alternatives that would come with lower interest rates as well as financial counseling to help people avoid borrowing in an emergency again.