CFPB takes big step toward unwinding payday lending rule

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The Consumer Financial Protection Bureau on Wednesday proposed an overhaul of its payday lending rule that would roll back tough underwriting requirements that were championed by the agency in the Obama administration.

In a major victory for payday lenders, the agency — led by new Director Kathy Kraninger — plans to rescind the centerpiece of the original rule: rigorous steps forcing lenders to assess borrowers' ability to repay credit. The ability-to-repay provision was seen by supporters as a protection against spiraling consumer debt, but lenders said it threatened their business model.

Kraninger, a Trump appointee who has been on the job less than two months, was widely expected to eliminate restrictions on payday lenders by arguing there was insufficient evidence to support mandatory underwriting of small-dollar loans. The original rule was finalized in 2017 under then-Director Richard Cordray, but the key parts of the rule have not yet gone into effect.

“The Bureau is concerned that these provisions would reduce access to credit and competition in states that have determined that it is in their residents’ interests to be able to use such products, subject to state-law limitations,” the CFPB said in a press release.

The new proposal would leave intact the rule's payment restrictions, which limit the number of times a lender can try to access a consumer's checking account to two consecutive attempts. The restrictions were designed to protect borrowers’ funds from being garnished by payday lenders or from incurring repeated overdraft fees.

However, the CFPB signaled that it may also consider easing the payment restrictions at a later date, further winnowing down the original rule. The agency noted that it has received petitions from the industry to exempt debit card payments and certain types of lenders or loan products from the payment limits. It also may delay the compliance date for the payment provisions.

The proposal is open for public comment for 90 days, the CFPB said.

The CFPB also is proposing delaying until November 2020 the compliance date for the 2017 final rule, which is supposed to go into effect in August 2019. The bureau issued a separate proposal on the compliance date that is open for public comment for just 30 days.

“The Bureau will evaluate the comments, weigh the evidence, and then make its decision,” Kraninger said in a press release. “In the meantime, I look forward to working with fellow state and federal regulators to enforce the law against bad actors and encourage robust market competition to improve access, quality, and cost of credit for consumers.”

Payday lenders have spent years lobbying to gut the 2017 payday rule, claiming regulations would force storefront lenders to go out of business. Under Cordray, the CFPB sought to eliminate the worst abuses in small-dollar lending that resulted in consumers repeatedly rolling over payday loans and getting trapped in a cycle of debt.

In January 2018, then-acting CFPB Director Mick Mulvaney signaled that he planned to revisit the ability-to-repay provisions before the final rule issued by Cordray went into effect. Last year, Mulvaney sided with two payday lending trade groups that sued the CFPB in April 2018 to invalidate the rule, alleging it was “arbitrary and capricious” and therefore in violation of the Administrative Procedure Act.

In October, the CFPB said it would revisit only the ability-to-repay provisions of the payday rule and not the payments provisions “in significant part because the ability-to-repay provisions have much greater consequences for both consumers and industry than the payment provisions.”

Some had hoped the payday lending rule would be repealed outright through lawmakers' authority under the Congressional Review Act. The law gives Congress 60 legislative days to review and possibly repeal new regulations, but there was not widespread support for such a repeal of the payday rule. Half a dozen Republicans governors in recent years have taken actions against payday lenders.

Industry groups quickly praised the agency's efforts to reopen the payday rule.

“We appreciate the CFPB’s reconsideration of the flawed small-dollar lending rule. Study after study has shown about half of American families cannot cover emergency expenses," Richard Hunt, CEO of the Consumer Bankers Association, said in a statement.

Yet some urged the agency to go even further. Dennis Shaul, CEO of the Community Financial Services Association of America, said he would have preferred the agency to have repealed the 2017 rule "in its entirety."

"These rulemakings are good first steps, and we appreciate that the CFPB has recognized some of the critical flaws of the final rule as promulgated during former Director Richard Cordray’s tenure," Shaul said in a press release.

“However, we are disappointed that the CFPB has, thus far, elected to maintain certain provisions of its prior final rule, which also suffer from the lack of supporting evidence and were part of the same arbitrary and capricious decision-making of the previous director."

If the agency finalizes the proposed overhaul, the changes could attract legal challenges. Consumer groups are expected to sue the CFPB, arguing that the agency lacks sufficient research to support rescinding the underwriting requirements, which they say violates the APA.

“In proposing to undo the rule against abuses in payday and car title lending that the CFPB crafted after five years of careful study and an open process, the new CFPB director Kathy Kraninger is allowing the payday lenders to drive policy at the agency, just as Mick Mulvaney did,” Linda Jun, senior policy counsel at Americans for Financial Reform, said in a press release issued by a coalition of over 700 consumer advocacy groups.

Cordray himself issued a statement saying the proposal "should be and will be subject to a stiff legal challenge."

"The fight over this rule offers a stark choice between preserving the profits of payday lenders or protecting some of the hardest-hit consumers," Cordray said. "The move to unwind the rule is based on a claim of protecting 'access to credit' — but credit that is offered without regard to the borrower’s ability to repay is irresponsible and often predatory."

Banks had criticized the original rule arguing that the CFPB could have included measures to make it easier for traditional financial institutions to compete in the small-dollar lending space.

In the new proposal, the CFPB said it "recognized that some community banks and credit unions occasionally make short-term secured or unsecured loans," but noted that those loans essentially fall outside of the rule's restrictions because bank installment loans have longer terms than those of payday lenders.

"Allowing banks to operate in this space — subject to sound banking practices — will prevent bank customers from being forced to rely on less regulated and more costly sources of funds like online lenders, check cashers or pawnshops," Hunt said.

Currently, 17 states and the District of Columbia have passed regulations setting fees or interest rate caps on payday loans, the CFPB said/ Last year, voters in Colorado passed a new law that capped interest rates at 36%. In Ohio, voters in November approved capping interest rates at 28%.

The Dodd-Frank Act authorized the CFPB to write rules on small-dollar loans. The 2017 final rule alleged that payday lenders engaged in "unfair" and "abusive" practices. The agency's new notice of proposed rulemaking would seek to rescind that finding.

The 2017 final rule "is not sufficiently robust and reliable" to support that determination "in light of the impact those provisions will have on the market" and "the ability of consumers to obtain such loans," the CFPB said in the new proposal.

The revamped payday rule would require that lenders provide consumers with written notice before making a first attempt to withdraw payment from a bank account and before subsequent attempts.

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Payday lending UDAAP Dodd-Frank Small-dollar lending Kathy Kraninger CFPB