By Brian Skinner, Esq.
In a little reported development that is likely to have a big impact on consumer lending, in July, the Consumer Financial Protection Bureau (CFPB) rescinded its 2017 payday loan rule. The move could leave millions of Americans at high risk of becoming trapped in a cycle of debt.
The final rule rescinds small-dollar lending industry underwriting requirements that had been imposed in a 2017 regulation under former CFPB Director Richard Cordray. The changes developed under current CFPB Director Kathy Kraninger are projected to save the payday lending industry more than $7 billion a year.
Citing the CFPB’s own data showing that payday lenders rely on such re-borrowings as a major source of revenue, the proposed 2017 rule which was developed after five years of research on payday lending practices, sought to eliminate repeat re-borrowings by a single user. In a press release announcing the final rule, the bureau said there was "insufficient legal and evidentiary bases" for the 2017 rule’s mandatory underwriting provisions. The CFPB’s decision came after the payday lending industry lobbied heavily to rescind the 2017 rule asserting that it would have eliminated 55% of revenue for lenders that offer loans of 45 days or less.
The proposed rule included safeguards for single-payment loans and encouraged lenders to offer affordable small installment loans that could have saved millions of borrowers billions of dollars annually. However, the final rule adopted by CFPB scraps those consumer protection measures, specifically the ability-to-repay provision, which curbed unaffordable loan terms by requiring lenders to determine a borrower’s capacity for repaying loans all at once.
The CFPB said it will a undertake new research focusing on identifying information that could be disclosed to consumers during the small-dollar lending process to allow them to make the most informed choices. The bureau said it also is going to implement payment provisions in the 2017 final rule that never went into effect. Those provisions prohibit lenders from withdrawing funds from a consumer's bank account after two consecutive failed attempts unless consumers consent to further withdrawals. The payment provisions also require that lenders provide consumers with written notice before making their first attempt to withdraw payment from a bank account. The payment provisions are intended to increase consumer protections from harm associated with lenders’ payment practices.
It is very likely that consumer protection groups will challenge the new rule in court. Consumer groups are expected to argue that the CFPB violated the Administrative Procedure Act that requires rigorous research and analysis, not just a policy disagreement, to change existing rules.
It is also likely Congressional Democrats will attempt to repeal the rule with legislation. Under the Congressional Review Act, Congress can overturn agency rules by a simple majority vote if lawmakers vote within 60 legislative days of a rule being published in the Federal Register.
Currently, 18 states and the District of Columbia restrict high-cost payday loans, according to the Consumer Federation of America.
Consumer advocates, like The Pew Charitable Trusts, believe the CFPB’s payday rule will hurt consumers since it eliminates ability-to-repay protections, exposing the 12 million Americans who use payday loans each year to unaffordable payments at annual interest rates that average nearly 400 percent. Other consumer advocates note that the CFPB action comes at a time when consumers may be more vulnerable to predatory lenders because of the economic contraction resulting from the global pandemic.
On the other hand, those in favor of the CFPB action argue that the best way to provide broad-based access to credit is to foster a competitive environment where lenders and borrowers can agree on the best terms for their circumstances. They believe that the 2017 proposed rule was driven by over-zealous paternalism and politics, not by evidence or an interest in well-functioning financial markets.
It is worth noting that the CFPB has also tried to expand access to credit by encouraging banks to offer installment loans or lines of credit for amounts of up to $2,500. Banks do not usually offer affordable small loans to their customers because of regulatory uncertainty. In May, the CFPB issued a no-action letter template designed to ease uncertainty and allow companies to develop such credit products without fear of supervisory action. The template, requested by the Bank Policy Institute, could be used by banks interested in providing small-dollar loans. All of this means that banks are now better positioned to offer affordable small loans to their customers who currently use high-cost credit such as payday and auto title loans.
Brian J. Skinner is the former counsel to the West Virginia House of Delegates Committee on the Judiciary and counsel to the West Virginia Senate Minority Caucus. He has over a decade of experience as an adviser to legislators on legal and political issues related to pending legislation; providing research and legal analysis services to legislative committees; and preparing bills, resolutions, amendments, and other documents for the West Virginia Legislature.