Payday Lenders Balk at CFPB's Proposed Rules

A businessman who owns payday lender Thrifty Loans LLC in Shreveport, La. is among a group of small business owners accusing the Consumer Financial Protection Bureau of plans to dismantle the payday lending industry through proposed new rules.

The CFPB's plan, submitted in March, restricts lenders from collecting funds from customers in ways that often result in excessive fees. Two approaches are under review: prevention and protection. In short, the lenders would choose to either ensure borrowers have the ability to repay before issuing credit or comply with limitations after a loan is issued such as restricting how often it can be rolled over or reissued within a certain time frame.

Mickey Mays, owner of Thrify Loans, believes the research the CFPB conducted to help formulate new rules was based on statistics from larger payday lending firms. New rules would devastate smaller payday lenders, he said.

Mays and the small business representatives have asked Sen. David Vitter, R-La., and Rep. Steve Chabot, R-Ohio, to stop the CFPB. Vitter is chairman of the committee on small business and entrepreneurship and is running to be governor of Louisiana. Chabot is the chairman of a committee on small business.

"We ask that you make sure the CFPB proceeds in a way that bolsters our ability to provide needed short-term loans for our customers,” Mays and the group wrote in a letter to Vitter and Chabot this month.

Sam Gilford, a CFPB spokesman, said the goal is to protect consumers who are vulnerable to falling into debt traps. A final version of the new rules is expected to be unveiled by the end of the year.Under the proposed prevention measures, payday lenders could be required to judge whether a borrower can afford the additional debt at the onset of a loan. Lenders also could be obligated to comply with various rules designed to make sure borrowers can repay their loans.

Finally, the proposals also could stop lenders from accessing borrowers' bank accounts in ways that causes them to lose control of their financial situation, according to the CFPB.

The payday lending industry long has been targeted by federal and state regulators. Lenders allow borrowers to take out short-term, high-interest loans often due by the customer’s next payday. Interest rates sometimes can be as high as 400%.

Payday lending representatives believe the CFPB's plan will be too broad and restrict access to small-dollar credit.

"Our preliminary review indicates customer will lose many of the credit options currently available today," said Edward D'Alessio, executive director of the Financial Service Centers of America, during a recent field hearing on the issue held by the CFPB. "Our employee base is very diverse. Approximately 80% are women, more than two-thirds are minorities … a rulemaking that causes FSCA members to close their doors will severely impact these hardworking employees and their families."

An estimated 12 million Americans use payday loans each year with the average loan at roughly $375, according to a survey by Pew Charitable Trusts. Because they are usually not paid back in time and must be made repeatedly, the average payday loan incurs $520 in fees.

Gilford said the CFPB began the rulemaking process on payday loans after research showed four out of five new payday loans are rolled over or renewed within 14 days. A large number of loans were given to borrowers trapped in long-term debt.

"These loans are intended to be a short-term credit solution but in too many cases consumers are finding themselves trapped in debt for a long period of time and finding themselves paying more in fees and interests than they borrowed," Gilford said.