Designed to overhaul and strengthen the financial regulatory system and provide protection from predatory lenders, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law on July 21st, 2010. The new legislation paves the way for the Consumer Financial Protection Bureau which is charged with protecting consumers from predatory and abusive financial products including credit cards, payday loans, bank fees, mortgages, traditional loans, and loans for people with bad credit.

One of the agency’s primary targets is the payday lending industry. The subject of much controversy over recent years, payday lending has been described as “predatory” and has drawn the criticism of state and federal politicians. Consumer rights vary from state to state, and most allow any and all interest rates. It is not unusual to see annual percentage rates of 400% or higher.

Rather than regulate payday lending directly, the new law has provisions that could significantly increase the number of small-dollar loans available to consumers. The Act contains provisions that incentivize financial institutions to offer low-cost loans that serve as safe alternatives to payday lending. Institutions are encouraged to offer more competitively priced loan products through loan loss reserve funds and technical assistance funding, along with programs and grants to promote financial access and education.

Does this mean that payday lenders are out of the woods? Far from it. The Dodd-Frank Act has put the power of industry regulation into the hands of the Consumer Financial Protection Bureau which will be responsible making these decisions once on its fully operational. We could and likely will see major changes to payday lending on a nationwide scale.

The Bottom Line:

Policymakers across the nation are targeting high annual interest rate lenders. In fact, several states have succeeded in implementing strict rate caps that have made it impossible for some short term lenders to continue operations.

So what’s next for payday lenders? Many of them are making the switch to traditional installment lending practices. With the help of consumer loan software solutions they are able to offer many of the same online approval, decision and payment conveniences that their payday loan customers have come to expect, thereby lessening the impact of this service transition. However, for many the change has come too late. Legislators seem intent on ending or severely restricting payday lending practices and it seems that the Consumer Financial Protection Bureau will give them the power to have the final say.