The Consumer Financial Protection Bureau on Wednesday proposed significantly weakening Obama-era rules governing payday lenders, boosting the fortunes of an industry accused of keeping low-income borrowers trapped in a cycle of debt.
Under the existing rule, set to take effect in August, payday lenders would be required to take several steps to ensure borrowers can afford the loans they are being offered. The latest proposals would rescind that requirement and delay the rule’s implementation until 2020.
The move is a big win for payday lenders. The industry feared the new regulations would force many of them to close their doors. Payday lenders aggressively lobbied lawmakers to block the rule last year and when that failed turned their attention to convincing the CFPB, now under the leadership of a Trump appointee, to change course.
“The Bureau will evaluate the comments, weigh the evidence, and then make its decision,” Kathy Kraninger, who became bureau director in December, said in a statement.
Industry officials said they were pleased with the proposed changes but frustrated that the CFPB didn’t go further. The proposal, for example, does not affect another key part of the rule that limits the number of times a borrower can take out a loan in succession.
The entire rule should be repealed, said Dennis Shaul, chief executive of the Community Financial Services Association of America, a large industry group. The other measures also “suffer from the lack of supporting evidence and were part of the same arbitrary and capricious decision-making of the previous director,” he said.
Consumer advocates said the CFPB had gone too far. The changes would “unwind the core part” of payday regulations, said Richard Cordray, the bureau’s former director who finalized the rules in his final weeks in office. “It’s a bad move that will hurt the hardest-hit consumers. It should be and will be subject to a stiff legal challenge,” Cordray said on Twitter.
The proposed revision is one of the most significant steps the Trump administration has taken in its effort to remake the CFPB, created after the global financial crisis to protect consumers from financial companies. Republicans and business leaders complained for years that the bureau was being too aggressive and that it often pushed legal limits to go after financial companies.
Under the Trump administration, the CFPB has softened its approach. It dropped several lawsuits against payday lenders last year and stripped enforcement powers from its fair lending office. Rather than pursuing penalties, the bureau must balance the needs of consumers and the financial companies it regulates, agency leaders have said.
The overhaul of the payday lending rule is “disturbing, but not surprising,” said Linda Jun, senior policy counsel at Americans for Financial Reform, a consumer advocacy group. The “industry thrives on being able to do whatever it wants. That is their business model, to have zero standards.”
Payday lenders have traditionally been regulated by a hodgepodge of laws in the more than two-dozen states where the practice is legal. While the loans are usually small, $350 to $500, they come with potential interest rates of 300 percent or more. About 12 million people take out such loans each year, and payday lenders say they are helping a neglected market shunned by traditional banks.
The CFPB rule, finalized in 2017, was the first significant federal effort to regulate payday lenders and took more than five years to develop.
When the rules were released, payday lenders quickly pounced on the provision requiring them to ensure that borrowers could afford their loans, including checking their credit reports and verifying their income. Complying with such requirements is too costly for the small loans the industry dispenses, lenders argued. That requirement alone would force many payday lenders out of business, they said.
The marketplace for short-term, high-interest loans should be regulated, but the Obama-era rules are too cumbersome and costly, the industry said before eventually suing the CFPB to block the rule.
When Trump appointee Mick Mulvaney took control of the bureau as acting director last year, the CFPB began to reconsider the regulations. A review determined there wasn’t enough legal basis to justify the tough underwriting standards included in the original rule, a senior CFPB official who spoke on the condition of anonymity said in a briefing with reporters Wednesday.
Payday loans are often costly, but that doesn’t make them illegal, said the official, who was not authorized to speak publicly. “The high price of a product or not is not per se an indication that something is abusive or unfair,” the official said.
The public has 90 days to provide comments to the CFPB about the proposal, and Kraninger, the new director, will consider all options, the official said. The bureau may even decide to revisit the issue of requiring such lenders to comply with certain standards for approving loans later, the official said.
The CFPB will also continue to provide oversight of the industry, the bureau official said, noting that it had reached a $100,000 settlement with one lender, Cash Tyme, on Tuesday for among other things, making harassing collection calls. The bureau reached settlements with two other payday lenders over the last month. “We still have examination authority of payday lenders,” the official said.