Payday Loan CFPB Overthrow is a Big Mistake | Payments Source
The Consumer Financial Protection Bureau’s work to protect Americans from predatory lending has reached an important crossroads. The youngest federal agency, created by Congress after the financial crisis, is struggling to know what to do about the payday lending scourge. Unfamiliar to many affluent Americans, payday loans have spread across much of the country. But it was not always so. With average Interest rate of around 400%, payday loans were illegal in virtually every state for about two hundred years.
Although payday loans have a short initial term, many borrowers are unable to repay and find themselves trapped in a repeated borrowing cycle. CFPB Research found this “[m]more than four out of five payday loans are re-borrowed within a month, usually just on or shortly after maturity. Unsurprisingly, payday loans are causing interest rates to rise. overdraft fees, bad checks, and involuntary bank account closures. Payday loans are associated with a increased risk of bankruptcy and sociologists have linked the use of payday loans in neighborhoods to the increase in criminality, anxiety, abandoned medical expenses, and bad health. In a recent American banker editorialMr. Beau Brunson ignored these documented misdeeds of the payday loan debt trap.
When it comes to political remedies, a super majority of Americans – including Democrats and Republicans – support traditional usury laws that typically cap rates at no more than 36% per year. Sixteen states, plus the District of Columbia, have usury limits effectively prohibiting payday loans. Interestingly, in the 2016 election 72% of South Dakotas voted to reinstate a 36% usury limit, beating President Trump’s tally by more than ten points. Traditional usury laws can be written to authorize the vast majority of traditional credit, including even some of the most expensive credit cards, while effectively prohibiting predatory triple-digit interest rate payday loans and their alike. Congress itself has taken this approach of capping rates at 36% for all active services. military service members at Pentagon request. The country’s men and women in uniform still have wide access to credit, but are protected from the most predatory expensive loans.
For the rest of us, Congress has given the CFPB the power to shut down any “unfair, deceptive or abusive” financial service. After spending five years studying, debating, collecting public comment and holding hearings on how to deal with the financial damage created by payday loans, the agency has come to the conclusion that many payday loans are unfair and abusive. In 2017, the CFPB adopted a compromise regulation which, in effect, says this: lenders must verify that loan applicants have the capacity to repay before granting the loan. To give lenders time to adjust, compliance was not required until next August.
Most traditional creditors have no problem with this type of common sense underwriting requirement. Similar rules on repayment capacity currently apply to credit cards and mortgages. Responsible lenders want their loans to be repaid on time. In contrast, payday loans are more profitable when borrowers barely cover the interest accrued every few weeks but cannot repay the loan principal. The most profitable payday loan is a hamster wheel, with the borrower sprinting perpetually but never actually moving forward.
Instead of adapting to the rules of compromise, payday lenders have gone out of their way to protect their profits. They submitted thousands of fraudulent comments at CFPB. They cynically held their last national conference at one of President Trump’s golf resorts in Miami and are intend to return in April. And they sued the agency in Texas, asking a federal judge to both overturn the compromise rules and declare the CFPB fully unconstitutional. Mostly, they have been lobbying, and lobbying and lobbying.
Now it looks like the Trump administration is planning to give the predatory lending lobby what it wants. Earlier this month, Trump-appointed consumer protection agency executives announced proposed changes that would effectively stifle the repayment capacity trade-off rule while it is still in the cradle. The new CFPB approach erases pending regulatory underwriting requirements and would effectively allow hamster wheel payday loans to continue unabated. The administration’s latest decision is against public opinion and leaves Americans in economic trouble without significant federal protection against predatory loans that leave people worse off.
Consumer advocates, religious leaders and veterans rights organizations will all submit comments to the CFPB urging it to keep the payday rule intact. Hopefully the office’s new leadership will listen – and realize that its mission is to protect consumers, not predatory lenders.
It is also high time that more responsible leaders in banking and Congress took action. If the CFPB does not move forward with its payday lending regulations, it is time for Congress to enact – and the banking industry to accept – a modern, credit card tolerant national usury limit of 36% by year to end the usurer of lenders once and for all.