New York — The nation’s federal financial watchdog said Wednesday that it plans to abolish most of its critical consumer protections governing payday lenders.
The move is a major win for the payday lending industry, which argued the government’s regulations could kill off a large chunk of its business. It’s also a big loss for consumer groups, who say payday lenders exploit the poor and disadvantaged with loans that have annual interest rates as much as 400 percent.
“The CFPB was supposed to protect consumers. Unfortunately, the agency is now working to protect payday lenders,” said Christopher Peterson, director of financial services at the Consumer Federation of America and a law professor at the University of Utah, in a statement.
The cornerstone of the regulations was a requirement that lenders make sure borrowers could afford to repay a payday loan without being stuck in a cycle of debt, a standard known as “ability to repay.” This standard would be eliminated under the new rules.
Critics of the payday lending industry have argued that without these underwriting standards, the CFPB’s new regulations are effectively toothless. The main criticism of the payday lending industry was that many borrowers would take months to repay a loan that was originally designed only to last a couple of weeks.
“This proposal is not a tweak to the existing rule … it’s a complete dismantling of the consumer protections (the bureau) finalized in 2017,” said Alex Horowitz, a researcher with Pew Charitable Trusts, a think tank whose research on the industry was relied on heavily by the bureau when the original rules were unveiled a year and a half ago.
The average annual percentage rate on payday loans is nearly 400 percent, which comes to $15 for every $100 borrowed, according to Pew. But lenders in states without a rate cap can charge upwards of.
Every year, roughly 12 million people in the U.S. borrow a total of $50 billion, spending some $7 billion on interest and fees, according to The Pew Charitable Trusts.
Under new management
The announcement was the first rollback of regulations under the CFPB’s new director, Kathy Kraninger, who. Mick Mulvaney, who was appointed by President Donald Trump’s as acting director of the bureau in late 2017, announced a year ago that the bureau was intending to revisit the rules.
Kraninger, who before being nominated by President Donald Trump in 2018 to lead the agency, was a relatively unknown mid-level bureaucrat at the Office of Management and Budget, and she has drawn criticism for lacking experience in financial services. Kraninger also previously was the Clerk for the Senate Appropriations Subcommittee on Homeland Security.
Under President Obama, the CFPB spent close to five years working on a process to finally nationalize the regulation of the payday lending industry, which is mostly regulated at the state level. The bureau started the process back in 2012 and its finalized rules were finished in late 2017. It was the last major pieces of regulation done under Richard Cordray, the bureau’s first permanent director, before he left the bureau.
The CFPB’s proposal is “a bad move that will hurt the hardest-hit consumers,” Cordray wrote on Twitter.
CFPB did propose keeping one part of the payday lending regulations: a ban on the industry from making multiple debits on a borrower’s bank account, which consumer advocates argued caused borrowers hardship through overdraft fees. In a statement, one payday lending industry group felt the CFPB’s repeal did not go far enough, and would have wanted the regulations over debits repealed as well.
The proposed new rules are subject to a 90-day comment period by the public. The proposed changes are almost certain to face legal challenges, since the bureau is taking a radical departure from its previous position.