Office of Consumer Affairs to overturn payday loan rule: NPR
Carolyn Kaster / AP
The Consumer Financial Protection Bureau targets one of the hallmarks of the Obama administration: a rule that would protect the most vulnerable borrowers from the increased debt that can accumulate with payday loans.
The rule never took effect. And now the Consumer Protection Bureau is proposing to take it off the table.
Agency chief Kathy Kraninger said in a statement that removing the rule would encourage competition in the payday lending industry and help improve credit options for borrowers in need.
Critics say the consumer protection bureau is siding with the very industry it is supposed to regulate and is removing a rule that would have protected borrowers from soaring interest rates.
The way payday loans work is that payday lenders typically offer small loans to borrowers who promise to pay off the loans before their next paycheck. Interest on loans can have an annual percentage rate of 390% or more, depending on a CFPB 2013 Report. Another report from the office of the next year have found that most payday loans – up to 80% – are turned into another loan within two weeks. Borrowers often take eight or more loans per year.
A rule cracking down on payday loans was first proposed in 2016. President Obama touted the rule as an end to predatory lending. He cautioned payday lenders in a speech, “If you make this profit by trapping hard-working Americans in a vicious cycle of debt, you have to find a new business model.
The rule would have required lenders to determine whether customers could repay their loans. It would also limit payday lenders to just two attempts to withdraw money from borrowers’ accounts, a measure designed to target fees charged by payday lenders.
Under the Trump administration, the Office of Consumer Protection backed down. The rule was supposed to go into effect in January 2018 – but it never did. Instead, then CFPB director Mick Mulvaney delayed the rule.
Bureau officials said on Wednesday they plan to remove the part of the rule that requires payday lenders to check borrowers’ ability to pay. And they plan to postpone the rest of the rule until 2020.
A senior CFPB official said the bureau’s decision stems from concern that there is not enough evidence that payday loans are unfair and abusive enough to warrant the rule. Additionally, the official, who spoke to reporters on condition of anonymity, said if the rule went into effect, about two-thirds of borrowers would not be eligible for a payday loan.
Consumer advocates say move hurts borrowers.
“People in power have chosen to side with payday lenders rather than consumers,” said Kyle Herrig, senior advisor to consumer advocacy group Allied Progress.
Herrig said the pay rule we are discussing was drafted after five years of research, including reviewing millions of loan files.
“This research concluded that the repayment capacity standard was essential in preventing consumers from falling into the debt trap,” Herrig said.
Advocacy groups said removing protections would leave minority communities particularly at risk.
“With little accountability for their actions, payday lenders have long attacked communities of color and drained them of their hard-earned savings,” Hilary Shelton, director of the NAACP Washington office, said in a statement. “We strongly urge Kathy Kraninger to reconsider her decision to weaken the payday loan rule and allow it to move forward as planned without delay.”
Marisabel Torres, senior policy analyst at UnidosUS, said her advocacy group and “thousands of Latinos” have joined a nationwide campaign calling for a tough rule on payday loans.
The CFPB was created to protect consumers from losses like those suffered during the Great Recession. Its first director, Richard Cordray, has taken aggressive steps to regulate banks and other financial institutions.
Republicans accused Cordray of exercising too much power. President Trump’s first choice as head of the agency, Mulvaney, called him “sick sad joke“and as a member of Congress proposed a bill to abolish it. Mulvaney had accepted campaign donations from payday lenders, and NPR reported that under his leadership, the agency relaxed its oversight of the industry.
Payday lenders, including Select Management Resources, Advance America and Check Into Cash Inc. also made a substantial donation to Trump’s inaugural committee. The industry’s trade group, the Community Financial Services Association of America, held its annual conference at the Trump National Doral Golf Club near Miami in August 2018.