CFPB reversal on payday lending is a big mistake
The Consumer Financial Protection Bureau’s work to protect Americans from predatory loans has reached an important crossroads. The youngest federal agency, created by Congress after the financial crisis, has been struggling with what to do about the scourge of payday loans. Unfamiliar to many affluent Americans, payday loans have become widespread throughout most of the country. But it was not always so. With average interest rates of around 400%, payday loans were illegal in virtually every state for about two hundred years.
Although payday loans have short initial durations, many borrowers are unable to repay and become trapped in a cycle of repeat borrowing. CFPB research found that “[m]ore than four out of every five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter.” Unsurprisingly, payday loans lead to increased rates of overdraft fees, bounced checks, and involuntary bank account closures. Payday loans are associated with an increased risk of bankruptcy and social scientists have connected payday loan usage in neighborhoods to increased incidence of crime, anxiety, forgone medical expenses, and poor health. In a recent American Banker op-ed, Mr. Beau Brunson ignored these documented harms of the payday loan debt trap.
As far as policy remedies, a super majority of Americans — including both Democrats and Republicans — support traditional usury laws that typically cap rates at no more than 36% per annum. Sixteen states, plus the District of Columbia, have usury limits effectively prohibiting payday loans. Interestingly, in the 2016 election, 72% of South Dakotans voted to reestablish a 36% usury limit — beating President Trump’s tally there by over ten points. Traditional usury laws can be written to allow the vast majority of mainstream credit, including even some of the most expensive credit cards, while still effectively prohibit grinding, predatory triple-digit interest rate payday loans and their ilk. Congress itself adopted just this approach of capping rates at 36% for all active duty military service members at the Pentagon’s request. The nation’s men and women in uniform still have ample access to credit but are protected from the most predatory high-cost loans.
For the rest of us, Congress gave the CFPB the authority to stop any “any unfair, deceptive or abusive” financial services. After spending five years studying, debating, taking public comments and holding hearings on how to deal with the financial harm created by payday lending, the agency came to a conclusion that many payday loans are unfair and abusive. In 2017 the CFPB adopted a compromise regulation that, in effect, says this: Lenders should verify that loan applicants have the ability to repay before making the loan. To give lenders time to adjust, compliance wasn’t required until this upcoming August.
Most mainstream creditors have no problem with this type of common-sense underwriting requirement. Similar ability-to-repay rules currently apply to both credit cards and mortgage loans. Responsible lenders want their loans repaid on time. In contrast, payday lending is most profitable when borrowers barely cover the accrued interest every few weeks but can’t pay off the loan principal. The most profitable payday loan is a hamster wheel, with the borrower perpetually sprinting but never actually moving forward.
Instead of adjusting to the compromise rules, payday lenders have pulled out all the stops to protect their profits. They submitted thousands of fraudulent comments to the CFPB. They cynically held their last national conference at one of President Trump’s Miami golf resorts and are planning to go back again in April. And they sued the agency in Texas asking a federal judge to both strike down the compromise rules and declare the CFPB entirely unconstitutional. Above all, they have lobbied, and lobbied and lobbied.
Now, it looks like the Trump Administration is planning to give the predatory loan lobby what it wants. Earlier this month, the Trump-appointed leaders of the consumer protection agency announced proposed changes that would effectively strangle the compromise ability-to-repay rule while it’s still in the crib. The new CFPB approach wipes out the pending regulation’s underwriting requirements and would effectively allow hamster-wheel payday lending to continue unabated. The administration’s latest move is against public opinion and leaves economically struggling Americans with no meaningful federal protection from abusive loans that leave people worse off.
Consumer advocates, faith leaders, and veterans’ rights organizations will all submit comments to the CFPB urging it to keep the payday rule intact. Hopefully, the bureau’s new leadership will listen — and realize that its mission is to protect consumers, not predatory lenders.
It is also high time for more responsible leaders in the banking industry and in Congress to step up. If the CFPB does not move forward with its payday lending regulation, it is time for Congress to enact — and the banking industry to accept — a modern, credit card tolerant, national usury limit of 36% per annum to stop payday lenders’ loan sharking once and for all.