Payday loan brokers are individuals or companies that serve as the mediator between the client and the direct lender. A broker is responsible for passing the names and information of applicants to a group of lenders, who in turn compete for their business; or at least that is what some brokers advertise.
Payday loan brokers serve an important role for some lenders because they are the marketing vehicle and lead generation source. A broker can help a company eliminate advertising and client acquisition expenses, ultimately increasing their operating budgets and hopefully profits. Most of the larger brokers in the industry have a network of direct lenders that will be given an opportunity to review the lead before purchasing it. Unlike other types brokering models in which a company gets paid a percentage of a transaction, payday loan brokers typically get paid on each lead.
While the set-up for each broker may be different the industry norm for the larger companies tends to follow the same model. When a broker receives a lead it’s disseminated through a chain. This chain is set up through a tiered system. These tiers allow selected lender to review an application and make a purchase. If the companies in the first tier opt out of a lead, the application will be sent to a second tier of direct lender. At this point the cost of acquiring the lead begins to decrease. This is called the tiered approach and most of the larger brokers have implemented a system that handles the different tiers. The first tier will always pay the most for a lead, while the last tier will get the lead at a large discount.
How do payday loan brokers advertise?
The majority of the top brokers in the industry use the internet as their number one advertising vehicle. Their websites are optimized to catch keyword phrases of potential clients searching for payday loans. When a client hits a site they will be giving an option to make a call through a toll free number or fill out an application. The application typically includes all the information that is needed to quickly underwrite a case and make an approval.
The other form of advertising is broadcast emails. Many of these brokers have a database of names of past clients and prospects. They will send out weekly, monthly, quarterly and yearly emails. In these emails are direct links to their website which a person can easily fill out an application and submit.
As social media takes off we are finding an increase in brokers that are using Twitter, Facebook and other social media platforms as a way to advertise their services.
Ongoing Legal and Regulation Issues
After doing research on this topic, I found a few interesting facts regarding payday loan brokers. As we discussed in a previous post, the payday loan industry is highly regulated. There are dozens of consumer advocacy groups that are fighting against the industry for lower rates and in some cases ceasing payday loans altogether. These regulations are directed towards the lender and not the broker. A broker doesn’t have to register with a state nor do they have to be licensed to sell leads. This is not uncommon because there are dozens of different industries within the financial markets in which an entity doesn’t have to be licensed. The big concern is lenders trying to pass as brokers in order to charge higher interest rates.
After federal regulators found that some lenders were partnering with national banking institutions in order to evade consumer protection laws, lenders began looking at other avenues in which can be used to sustain the rates they were used to charging applicants. According to a recent study by CRL, some lenders were posing as brokers in order to avoid interest rate caps. This is an ongoing problem that regulators are concerned about.
It’s my opinion that regulations will begin affecting brokers as well. As companies continue to game the system, regulators will be forced into making it mandatory to vent brokers as well; and this could have a grave effect on those companies that rely on brokerage firms to supplement their lead generation.
The first step is already happening. Today many states require brokers to list a disclaimer on their website stating they are not a direct lender. I’m sure more laws will follow.
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