Garnet Capital Advisors Blog

Payday lending has been increasingly scrutinized, driving a shift in focus to alternative lending.

Payday lending has long been a popular lending source for a segment of consumers in need of fast cash with less stringent lending criteria, but heightened regulatory scrutiny in this realm is driving a shift in in lending patters to other types of alternative lending sources.

Federal regulators are increasingly looking to place stronger restrictions on payday lenders. Last year, the Consumer Financial Protection Bureau announced a proposal of rules that will soon be in effect to more strictly regulate the industry. When these rules will be issued remains to be seen, but the notion of their emergence alone has generated concern over the industry.

Even advertising opportunities for payday lenders are being affected. Google recently announced it won't allow payday lenders to pay for ad space on the major search engine as of July 13. Advertisements for payday loans with 60-day (or less) terms, as well as for loans with at least a 36 percent APR, will not be allowed.

Alternative Lending is Becoming More Mainstream

As payday lending becomes increasingly scrutinized, more and more consumers are seeking out alternative means of obtaining the loans they need. There's a new focus on how to lend to low- and middle-income consumers.

Creative alternatives to payday loans are increasing. Take Cumulus Funding, for instance, which launched at Innovation Project 2016. The consumer finance company specializes in providing Income Share Agreements (ISA) to consumers looking for more flexible finance alternatives. The company's innovative income sharing product is intended to help low- and middle-income borrowers by dedicating repayments to a certain percent of paychecks, and only when paychecks are made. The instrument is also in compliance with state regulations.

The key to alternative lending essentially comes down to ensuring that everyone (borrowers and lenders) has all the information needed to make sound decisions.

Financial Education Key to Making Credit More Widely Available

In order to minimize the odds of defaults on loans, it's not always necessary to just cut off credit from borrowers who may not necessarily possess ideal credit. Denying loans to consumers who lack ideal credit will simply drive them to non-regulated and high cost lending sources. Rather than taking this drastic measure, more prudent underwriting standards should be implemented so that borrowers still have access to credit that meets their financial needs and capabilities, while simultaneously building credit scores.

Perhaps educating borrowers on more sound financial practices is what's necessary to help increase the choices that consumers have in order to obtain credit. Rather than denying credit to these borrowers altogether, maybe regulators should start focusing on teaching consumers to be prudent users of credit.

Many financial institutions are understanding the importance of transparency and education in the world of lending. Prepaid card company Green Dot recently announced its new 'Green Dot Money', an online lending platform geared towards low- to middle-income borrowers.

Rather than directly funding these loans from their balance sheets, the marketplace will pair up Green Dot clients with third-party lenders that specialize in lending to these highly-targeted groups.

The company developed such a platform in the hopes of taking advantage of recent changes in the realm of alternative lending.

Sound Underwriting Standards - Helping Consumers While Optimizing Loan Portfolios

While helping consumers become more enlightened about appropriate borrowing practices and credit, financial institutions and marketplace lenders can also benefit from more new and prudent lending standards. Loan sale advisory firm Garnet Capital is a firm believer in educating borrowers and upholding judicious underwriting standards in a competitive environment. Doing so can not only help consumers, but also keep loan portfolios as risk-free and profitable as possible.

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