CFPB takes big step towards easing payday loan rule
The Consumer Financial Protection Bureau on Wednesday proposed an overhaul of its payday loan rule that would override the agency’s strict underwriting requirements in the Obama administration.
In a major victory for payday lenders, the agency – led by new director Kathy Kraninger – plans to roll back the centerpiece of rule of origin: tough measures forcing lenders to assess borrowers’ ability to repay credit. The repayment capacity provision was seen by supporters as protection against skyrocketing consumer debt, but lenders said it threatened their business model.
Kraninger, a Trump-appointed person who has been in office for less than two months, was widely expected remove restrictions on payday lenders by arguing that there was no insufficient evidence to support the compulsory underwriting of small loans. The rule of origin was finalized in 2017 under the leadership of then-director Richard Cordray, but key elements of the rule have yet to come into effect.
“The Bureau is concerned that these provisions would reduce access to credit and reduce competition in states that have determined that it is in the best interests of their residents to be able to use such products, subject to limitations imposed by US law. ‘State,’ the CFPB said in a press release. Release.
The new proposal would leave intact the rule’s payment restrictions, which limit the number of times a lender can attempt to access a consumer’s checking account to two consecutive attempts. The restrictions were designed to protect borrowers’ funds from foreclosure by payday lenders or against repeated overdraft charges.
However, the CFPB has signaled that it may also consider relaxing the payment restrictions at a later date, further eliminating the rule of origin. The agency noted that it had received petitions from industry to exempt debit card payments and certain types of lenders or loan products from payment limits. It may also delay the date for bringing the payment arrangements into conformity.
The proposal is open for public comment for 90 days, the CFPB said.
The CFPB is also proposing to postpone the compliance date of the 2017 final rule, which is expected to take effect in August 2019, to November 2020. The office has issued a separate proposal on the compliance date that is open for public comment for only 30 days.
“The Bureau will assess the comments, weigh the evidence, and then make its decision,” Kraninger said in a press release. “In the meantime, I look forward to working with other state and federal regulators to enforce the law against bad actors and encourage strong competition in the market to improve the access, quality and cost of credit. for consumers. “
Payday lenders have spent years pushing to end the 2017 payday rule, claiming the regulations would force storefront lenders to close their doors. Under Cordray, the CFPB sought to eliminate the worst abuses in small dollar loans that have led consumers to repeatedly renew their payday loans and find themselves trapped in a cycle of debt.
In January 2018, CFPB Acting Director Mick Mulvaney said he planned to review the repayment capacity provisions before the final rule issued by Cordray came into effect. Last year, Mulvaney sided with two payday lending business groups that continued the CFPB in April 2018 to invalidate the rule, alleging that it was “arbitrary and capricious” and therefore in violation of the Law on Administrative Procedure.
In October, the CFPB said it would only review the payday rule’s repayment capacity provisions and not the payments provisions “largely because the repayment capacity provisions have consequences. much more important to consumers and industry than the payment of provisions. “
Some had hoped that the payday loan rule would be repealed by legislative authority under the Congressional Review Act. The law gives Congress 60 legislative days to consider and possibly repeal new regulations, but there was no Support for such a repeal of the pay day rule. In recent years, half a dozen Republican governors have taken action against payday lenders.
Industry groups were quick to praise the agency’s efforts to reopen the wage rule.
“We appreciate the CFPB’s review of the imperfect rule of small dollar loans. Study after study, about half of American families cannot cover emergency expenses, ”said Richard Hunt, CEO of the Consumer Bankers Association, in a statement.
Still, some urged the agency to go even further. Dennis Shaul, CEO of the Community Financial Services Association of America, said he would have preferred the agency to repeal the 2017 rule “in its entirety.”
“These rules are good first steps, and we appreciate that the CFPB has recognized some of the critical flaws in the final rule as enacted during the tenure of former director Richard Cordray,” Shaul said in a press release.
“However, we are disappointed that the CFPB has, so far, chosen to retain certain provisions of its previous final regulations, which also suffer from the lack of supporting evidence and were part of the same arbitrary and capricious decision-making. of the former director. “
If the agency finalizes the proposed overhaul, the changes could lead to legal challenges. Consumer groups are expected to sue the CFPB, arguing that the agency does not have enough research to justify waiving subscription requirements, which they say violates the APA.
“By proposing to rescind the payday loan and car title abuse rule that CFPB developed after five years of in-depth study and an open process, new CFPB director Kathy Kraninger, allows payday lenders to drive agency policy, just like Mick Mulvaney did, ”said Linda Jun, senior policy advisor at Americans for Financial Reform, in a press release issued by a coalition of over 700 consumer groups.
Cordray himself issued a statement saying the proposal “should and will be subject to serious legal challenge.”
“The fight for this rule presents a difficult choice between preserving the profits of payday lenders or protecting some of the hardest hit consumers,” Cordray said. “The decision to relax the rule is based on a claim to protect ‘access to credit’ – but credit that is offered without regard to the borrower’s ability to repay is irresponsible and often predatory.”
The banks had criticized the rule of origin, arguing that the CFPB could have included measures to facilitate competition from traditional financial institutions in the low dollar lending space.
In the new proposal, the CFPB said it “recognizes that some community banks and credit unions occasionally provide short-term secured or unsecured loans,” but noted that these loans are essentially outside the rule’s restrictions. because installment bank loans have longer terms than payday lenders.
“Allowing banks to operate in this space – subject to good banking practice – will prevent bank customers from being forced to rely on less regulated and more expensive sources of funds like online lenders, check tellers. or pawn shops, ”Hunt said.
Currently, 17 states and the District of Columbia have passed regulations setting fees or interest rate caps on payday loans, the CFPB said. Colorado voters passed a new law last year capping interest rates at 36%. In Ohio, voters approved an interest rate cap at 28% in November.
The Dodd-Frank Act authorized the CFPB to write rules on small loans. The 2017 final rule alleged that payday lenders were engaging in “unfair” and “abusive” practices. The new regulatory notice proposed by the agency would seek to reverse this finding.
The 2017 final rule “is not sufficiently strong and reliable” to support this determination “in light of the impact these provisions will have on the market” and “the ability of consumers to obtain such loans,” said the CFPB in the new proposal.
The new payday rule would require lenders to provide consumers with written notice before making a first payment withdrawal attempt from a bank account and before subsequent attempts.