What effect can the CFPB have on online lending?

The landscape for online short term lending has been dicey at best as of late. This alternative finance option can be supremely beneficial for a number of consumers who need fast, safe access to credit when banks and other traditional lenders have shut their doors in people's faces.

Take the situation that occurred during the Great Recession, for instance. For a few years from 2008 on, credit companies and banks tightened their purse strings and stopped giving out loans to people who weren't a sure thing. This meant that banks wouldn't risk letting those with subprime consumer credit scores borrow their funds, because with layoffs, inflation and other adverse factors, administrators were afraid they wouldn't be paid back.

These individuals, however, could find relief with short term lenders, because they tended to have more flexible regulations when it came to approving applications. In fact, many of these outfits didn't take traditional scores into account. There are hundreds of different ranking models that can be followed. For example, a number of these companies judge would-be borrowers based on their past ability to pay off utilities accounts on time. This, along with other financial factors, allows lenders to create Payment Reporting Builds Credit scores, which tend to provide a more comprehensive look at consumers' finances.

During times of economic turmoil, many people took to the Internet to garner loans. This way, they wouldn't have to enter a storefront and potentially alert acquaintances that they needed financial help to make ends meet. Moreover, they didn't have to spend money to get there and could enjoy the comfort of their own homes while applying.

Recently, though, the practice has been called into question by various leaders who may or may not understand all of the benefits of this alternative service. Specifically, New York Governor Andrew Cuomo is trying to ban online lenders from giving funds to consumers in the state, as there is a regional law banning businesses that attach more than a 25 percent interest rate. However, Cuomo's power has been debated, as many of these companies are operated by Native American tribes, which are only subject to federal laws.

Many entrenched in the debate are calling for the Consumer Financial Protection Bureau (CFPB) to oversee the situation. Detractors want the CFPB to rein in the companies, while lenders and some consumers want more oversight in the industry to placate those who don't support the sector. However, the CFPB's hands might be tied.

Cordray admits limited role
According to The Wall Street Journal, CFPB Director Richard Cordray recently stated that the CFPB can only do so much when it comes to this issue. He explained that there's not a whole lot the group can accomplish in order to influence short term lenders to either change their interest rates or tweak lending strategies.

Referencing the current fight between Native American tribes and the New York state government, Cordray said that debate boils down to federal and state laws. He explained that the CFPB regulates violators of nationwide regulations, which hadn't occurred. State authorities handle state matters, he specified, as quoted by the news source.

In fact, the WSJ reported that the CFPB has no authority to impose laws regarding interest rates, though there is a possibility that the body could pass laws concerning how many loans consumers can take out or designate a cooling-off period between loans.

The Online Lenders Alliance (OLA) is generally hoping that the CFPB comes out in a show of support for businesses in the short term lending sector. OLA spokesman Peter Barden told the news outlet that representatives recently met with the CFPB to "discuss the importance of online lending to the consumers who depend on it to meet their short term credit needs."