The Consumer Financial Protection Bureau is about to release sweeping new rules that take aim at the payday lending industry, a controversial attempt to rein in loans that offer lifelines to lower-income borrowers but come with staggeringly high fees.
But the controversy isn’t just about the scope of the regulations. It’s about the bureau making the rules. And whether that bureau should even exist.
Republican presidential candidate Sen. Ted Cruz (Tex.) has vowed in his stump speeches to abolish the agency. The House member who chairs the financial services committee, Rep. Jeb Hensarling (R-Tex.), calls the CFPB the epitome of abusive power. Republicans have tried to weaken the agency with red tape and document requests. Several lawmakers have recently introduced bills that would either diminish or wipe out the CFPB payday rules — which haven’t yet been unveiled.
In one respect, the debate over the CFPB follows a familiar American political contour — where does the federal government have the right to stick its hands? But over the last year, as the agency has turned its sights on payday lending, opposition to the CFPB has mounted and grown more urgent. And that's because of what the new regulations might do. Some analysts expect that the regulations wouldn't just force tweaks to the payday industry, but would potentially knock out its business model.
“This is rulemaking that could remove an entire product,” said David Newville, director of government affairs at the Corporation for Enterprise Development. “I think most reasonable people who are outside of the core industry recognize that the payday loan, the traditional payday loan, is not a good product. But at the same time, they have reservations: If this goes away, what will happen if there is nothing to fill the void? Will borrowers turn to loan sharks?
The CFPB — which is expected to unveil the new rules this spring — doesn’t need approval from Congress for the regulations to take effect. But Congress could enact legislation that reduces the CFPB’s clout. Currently, states have responsibility to determine what kind of lending is legal, and their approaches vary broadly. Fourteen states and the District place caps on interest rates, a de facto ban on payday lending as companies choose not to operate in places where they can't impose high rates. But in some states without such laws, payday stores — Speedy Cash, ACE Cash Express, Advance America — crowd lower-income neighborhoods, often offering loans at annualized percentage rates exceeding 350 percent.
The CFPB, as well as many consumer advocacy groups, say that payday loan companies trap borrowers in debt and depend on repeat borrowing and escalating fees to make money. A person might take out a payday loan to deal with a flat tire or a medical emergency. But two weeks later, when the money is due, that borrower doesn’t have enough cash to both make the payment and cover bills. So he takes out another loan. And another. According to CFPB data, only 40 percent of borrowers stop after a single loan.
Those who oppose the CFPB’s attempts to clamp down on payday lending — a mass of Republicans and a smaller number of Democrats — say the agency is better off leaving regulation to states, whose governments can decide on their own whether to be permissive or harsh. The CFPB was created by the Dodd-Frank Act in the aftermath of the financial crisis as a way to improve protections for consumers dealing with everything from home loans to debt collectors. The agency was the brainchild of Sen. Elizabeth Warren (D-Mass.).
If the CFPB has a foil, it is Hensarling, the House financial services committee chairman, who comes from one of the most lax payday states and who takes relish in grilling CFPB Director Richard Cordray during his twice-a-year testimony.
In Cordray’s latest testimony before Hensarling’s committee several weeks ago, the congressman talked about how Americans are angry about having their lives “increasingly ruled by out-of-touch Washington elites.” Cordray sat at a table, stoically staring back.
Hensarling said that Thomas Jefferson had once warned that government agencies would send “swarms of officers to harass our people and to eat out their substance.” He continued: “Today, the poster child of Jefferson’s lament is the CFPB. Its director, our witness, is neither elected nor accountable to the American people. Soon Mr. Cordray will presume to decide for all Americans whether he will allow them to take out small-dollar loans to keep their utilities from being cut off or to keep their car on the road so they can make it to work."
Cordray, poker-faced, looked off to the side.
“Congress has made Mr. Cordray a dictator,” Hensarling said.
Last March, the CFPB gave a glimpse of what to expect in the payday rules, offering an outline of the changes it was considering. The main thrust was a rule that took aim at repeat borrowing, trying to limit payday lenders from offering a multitude of consecutive loans. (The lenders could still offer back-to-back-to-back loans, but not back-to-back-to-back-to-back loans.) At the time, industry leaders said the rules would jeopardize their business. Stocks of publicly held payday lending companies have taken a beating in the last year. One company, QC Holdings, saw its stock fall by roughly 50 percent in a year before announcing in late January that it would delist from the Nasdaq exchange.
Still, the payday industry donates heavily to politicians and has advocates on both sides of the aisle. Earlier this month, Rep. Mick Mulvaney (R-S.C.) introduced a bill that would allow states to opt out for a five-year period from the CFPB payday rules. At the end of that five-year term, they could opt out again.
“One-size-fits-all approaches to public policy problems can inhibit the creation of effective solutions to problems,” the text of Mulvaney's bill reads.
Rep. Dennis Ross (R-Fla.) offered a different suggestion, and drafted a bill that would allow states to avoid the CFPB rules — provided they adopt the payday laws of Florida. Consumer advocate groups are unimpressed by the proposal, which was co-sponsored by Democratic National Committee chair Rep. Debbie Wasserman Schultz (D-Fla.): A recent report from the Center for Responsible Lending, analyzing 10 years of transaction data, found that loans made in Florida average APRs of 278 percent. The vast majority of loans — more than 80 percent — are made to Floridians in a cycle of more than seven loans.
Some experts who’ve studied small-dollar lending predict the CFPB’s payday rules will take affect across the nation. “I would not put my money on a bet that the CFPB will be hamstrung in a meaningful way,” said Nick Bourke, director of the small-dollar loan research program at Pew Charitable Trusts, who noted that the public holds an overwhelmingly negative view of payday loans.
The CFPB had no interest in commenting on the political climate. “I doubt that we would have much to say,” said Sam Gilford, an agency spokesman.
Clarification: This story has been updated to reflect that Rep. Debbie Wasserman Schultz is a co-sponsor of a bill that would provide states with an alternative to adopting the CFPB’s payday rules. Rep. Dennis Ross is the lead sponsor.
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