Payday lenders who became unintended casualties of the pandemic are eagerly awaiting the end to most government relief programs, but those who follow the industry say some high-cost loans may never fully rebound.
Congressional passage over the past 18 months of enhanced unemployment benefits, federal stimulus payments, a moratorium on evictions, and student loan and mortgage forbearance lowered the need for high-cost credit. In fact, the number of payday loans plummeted in some states by more than 50%.
But most federal government supports are set to expire in the coming months or, as in the case of enhanced unemployment benefits in some Republican-led states, have ended already. That has led to hope within the industry, and concern among consumer advocates, that high-cost lenders could see their volumes rise again in 2021 and 2022.
But the story is more complicated, in part because Americans used a lot of their stimulus dollars to pay down debt, in part because a generous monthly child tax credit could remain indefinitely, and in part because regulatory scrutiny is likely to tighten under the Biden administration.
“Everybody wants to get back to normal,” said Dana Sweeney, an organizer at Alabama Appleseed Center for Law and Justice, an advocacy group. “But nobody wants to get back to loans that have a 456% APR.”
Payday lenders say they are gearing up for a change in customer preferences, noting that small dollar loan volumes had been in decline generally since 2019.
“If there’s less customer demand, then we’ll look to see what the needs of our customers are, however we can meet them,” said Ed D’Alessio, the executive director of the INFiN Alliance, a financial services industry group.
Business for traditional storefront payday lenders, known for offering 400% annual percentage rates on loans, steep fees, and two-week payment plans, had been on the downswing nationwide. But the pandemic pushed those trends into overdrive.
Payday lending in Alabama, Indiana, Michigan, North Dakota, Washington, Kentucky, and Wisconsin dipped in 2020 between 40% and 60% of 2019 levels, with 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 issued in 2020 from 2019 levels, and a 30% decline in payday customers.
“Maybe there is a migration toward longer-term installment products, as opposed to the shortest-term single pay products,” said D’Alessio, who noted that alliance members only saw declines in their payday and other short-term loan products. “We still had good volumes around check cashing and remittances, which people came into our stores to conduct.”
But even online, high-cost installment lenders didn’t necessarily see a significant boost in business during the pandemic. Two of the biggest online lenders, Elevate Credit and Enova International, reported profit boosts in 2020, but not loan growth.
Instead, both companies reported a significant drop in charge-offs, meaning they took fewer losses on their outstanding loans.
“Both of these stories are consistent with people having more money,” said Alex Horowitz, the principal officer at the Pew Charitable Trusts Consumer Finance Project.
More Money, Fewer Loans
Not only did the government provide direct economic relief—data from Veritec showed the steepest drop in storefront payday lending when stimulus checks hit peoples’ bank accounts in March, April, and December 2020, as well as March and April 2021—but many regular payments were suspended.
Homeowners who had trouble paying their mortgages were able to apply for forbearance; student loans also had a forbearance option. An eviction moratorium was in place at the federal level as well as in many states and municipalities.
The Federal Reserve Bank of New York in April reported that 37% of Americans planned to use stimulus payments to pay down debt, while a further 37% saved that money.
But there is still concern, and the future is somewhat murky. Financial supports are ending, and with the delta variant of the coronavirus surging in areas with low vaccination rates, opponents of high-cost lenders are worried that people will go back to them.
“Folks are not back to where they need to be,” said Sue Berkowitz, the director of South Carolina Appleseed Legal Justice Center.
That may not mean that the industry gets back to where it was before the pandemic hit.
For one thing, because many people were able to boost their savings, they may not need to go back to high-cost lenders immediately, said Jialan Wang, a finance professor at the University of Illinois Gies College of Business.
Along with the pandemic relief, the Biden administration and congressional Democrats established an enhanced child tax credit that pumps as much as $300 per child into families’ bank accounts each month.
The credit is set to expire at year’s end, but President Joe Biden wants to continue it for at least the next five years, and Democrats are expected to push for extending the program in an upcoming budget reconciliation bill.
Considering that payday lending’s biggest periods are when children go back to school and just before Christmas, the child tax credit “could be something where households with children would definitely have lower demand” for payday and other high-cost loans, said Gabriel Schulman, an analyst with IBISWorld.
Consumers are starting to get more options, including wage access products that allow them to access portions of their paychecks early, and an increase in small-dollar lending at banks with lower rates. But those new products haven’t yet been subject to strict regulatory scrutiny and are only now getting off the ground, he added.
The need for quick cash from high-cost lenders is going to remain, but not at levels seen prior to the pandemic, Schulman said.
Tighter Rules Coming?
One other factor that could affect high-cost lending rebound is increased regulatory oversight, both at the Consumer Financial Protection Bureau and within states.
The CFPB in March said it plans to reinvigorate its oversight and enforcement of the short-term, small-dollar loan market, including potentially new rulemaking.
Since 2016, South Dakota, Colorado, Nebraska, and Illinois have instituted 36% interest rate caps on loans, and other states are considering such moves. On Capitol Hill, Democrats have introduced legislation for a 36% federal rate cap, but that is unlikely to make it through Congress.
“I think you’re going to see a lot of efforts in a lot of states to keep this kind of lending from growing again,” Berkowitz said.