Consumer bureau revokes payday lending restrictions

The Consumer Financial Protection Bureau (CFPB) on Tuesday revoked rules that required lenders to ensure that potential customers could afford to pay the potentially staggering costs of short-term, high-interest payday loans.

The bureau released Tuesday the final revision to its 2017 rule on payday loans, formally gutting an initiative with roots in the Obama administration that was aimed at protecting vulnerable consumers from inescapable debt.

The initial rule, released shortly before President Trump appointed new leadership at the CFPB, effectively banned lenders from issuing a short-term loan that could not be paid off in full by a borrower within two weeks.

The measure required payday lenders to determine whether the customer had the “ability to repay” the loan with an underwriting process similar to what banks use to determine whether a customer can afford a mortgage or other longer-term loan.

The CFPB has now issued a new version of the regulation that scraps those underwriting requirements, in line with a proposal released in February 2019. The new regulation leaves in place the original regulation’s restrictions on how frequently a payday lender can attempt to withdraw funds from a customer’s bank account.

“Our actions today ensure that consumers have access to credit from a competitive marketplace, have the best information to make informed financial decisions, and retain key protections without hindering that access,” CFPB Director Kathy Kraninger said in a statement.

“We will continue to monitor the small dollar lending industry and enforce the law against bad actors.”

The CFPB’s original payday lending rule was released in October 2017 under the bureau’s first director, Richard Cordray, a Democrat ideologically aligned with the agency’s architect, Sen. Elizabeth Warren (D-Mass.). The bureau issued a series of sweeping financial regulations during Cordray’s tenure, but few more controversial than the payday lending rule.

The 2017 payday lending rule was the first federal regulation specific to the payday lenders, which are banned in 17 states and the District of Columbia but ubiquitous where high-cost, short-term loans are legal.

Payday loans are ostensibly designed to help customers with few credit options cover one-time expenses at a higher cost. While most payday loans are due within two- or four-week periods, about half of payday loans are extended at least 10 times, according to CFPB research, drastically increasing interest and fees along the way.

Democrats and consumer protection advocates had long targeted the high costs and aggressive collection practices employed by payday lenders. Critics accuse the industry of intentionally trapping thousands of vulnerable Americans in endless cycles of compounding debt with confusing terms and hidden fees.

“At this moment of health and economic crisis, the CFPB has callously embraced an industry that charges up to 400 percent annual interest and makes loans knowing they will put people in a debt trap,” said Lauren Saunders, associate director of the National Consumer Law Center (NCLC).

Defenders of payday lenders say the industry provides crucial temporary financing to Americans who lack a credit card, and are frequently the only lenders in economically depressed or remote areas.

Advocates for the industry warned that the original CFPB rules would effectively wipe out payday lenders and praised the bureau for reversing course.

“While we are still reviewing the new rule, it is clear that the CFPB’s decision to issue a revised final rule will benefit millions of American consumers. The CFPB’s action will ensure that essential credit continues to flow to communities and consumers across the country, which is especially important in these unprecedented times,” said D. Lynn DeVault, chairman of the Community Financial Services Association of America (CFSA), a trade group for payday lenders.

Republican lawmakers also accused the CFPB under Cordray of targeting payday lenders with its initial rule out of political prejudice toward the industry.

“Today’s move by the CFPB ensures borrowers have access to these loans and will increase competition and choice in the market, ultimately benefitting the loan recipient,” said Rep. Patrick McHenry (N.C.), ranking Republican on the House Financial Services Committee, in a Tuesday statement.

The payday lending industry’s fortunes quickly shifted when Cordray resigned in November 2017, giving Trump an early chance to rein in the watchdog agency. Trump tapped Mick Mulvaney, his then-budget director, to serve as the CFPB’s acting director until Kraninger was confirmed more than a year later.

The original payday loan rule was one of Mulvaney’s first targets upon taking over the CFPB. He delayed the deadline for lenders to comply with the rule in January 2019 and kicked off the rewriting process soon after.

While the CFPB director has unilateral authority over almost every agency action, Mulvaney had to prove that the original payday lending rule was based on faulty research to make sure the rewritten version could hold up in court. CFPB officials appointed by Mulvaney argued in the February 2019 draft of their rewrite that their predecessors’ research did not justify the strict standards applied to payday lenders, drawing backlash from consumer advocates.

A former CFPB economist argued in a memo obtained by The New York Times in April that Mulvaney’s political appointees manipulated data and published misleading research to justify scrapping the original payday rule. Democratic lawmakers and payday industry critics seized on the allegations, calling for an investigation into how the new payday rule was and formal restart of the rulemaking process.

“The memorandum provides details of a CFPB rulemaking process that, if true, flagrantly violates the Administrative Procedure Act’s requirements—in which political appointees exerted improper influence, manipulated or misinterpreted economic research, and overruled career staff to support a predetermined outcome,” wrote 12 Democratic senators in a May 4 letter to Kraninger.

Kraninger brushed off those concerns in her own response.

“Upon my determination, the Bureau will issue a final rule on the basis of the record before the agency,” Kraninger wrote in the letter dated May 18.  “And upon that basis, I will defend the agency’s action.” 

Updated at 1:10 p.m.