The Consumer Financial Protection Bureau’s payday loan rule was supposed to reduce the number of Americans who get mired in debt they can’t afford.

But in an ironic twist, the 4-month-old rule is being used in state legislatures to justify the creation of a new category of loans that would be even costlier for many borrowers.

One such bill in Florida has zipped through three legislative committees in recent weeks. The Indiana House of Representatives voted to pass a similar measure Wednesday.

The CFPB rule, which faces an uncertain future in Washington, is designed to sharply reduce the use of two-week payday loans. But it does not crack down on longer-term installment loans with triple-digit annual percentage rates, and that is where payday lenders now see an opportunity in state capitals.

Map of bills on high-cost installment loans; payday loans

“They have crafted this so that they would not fall under the CFPB rules,” said Alice Vickers, director of the Florida Alliance for Consumer Protection.

The industry’s lobbying effort stretches back several years. In anticipation of the CFPB’s action, payday lenders were pushing lawmakers in numerous states to authorize high-cost installment loans.

But for years, the threat that the CFPB posed to the payday industry was merely conjectural. The final rule, which was released in October, presents a clearer target.

“This rule, a 1,700-page rule, imposes burdensome regulations on lenders that will eliminate this credit option for consumers,” state Sen. Rob Bradley, a Republican who is sponsoring the Florida legislation, said at a hearing in January.

“And there’s 10,000 people who work in this industry whose jobs would be threatened if we do not address the actions of the federal government,” he said at another hearing.

Last year, bills to legalize high-cost installment loans were introduced in 10 states, including Michigan, Georgia and Oklahoma, according to the Center for Responsible Lending. All of those measures were rejected.

This year, payday lenders appear to be better positioned to score victories.

Last month in Tallahassee, an industry-backed measure was approved by one Florida Senate committee by a 9-2 margin. In another committee, the vote was 7-1. A House subcommittee approved a related bill by a 15-0 margin. The two measures have yet to get votes in the full House and Senate.

The Florida Senate legislation would authorize 60- to 90-day loans of up to $1,000, while continuing to allow payday loans. While the two- to three-month loans would carry a lower annual percentage rate than the shorter-term loans, they would be substantially costlier for many borrowers.

A borrower who took out a 60-day, $1,000 loan under the pending legislation would pay fees of around $215, according to an analysis by Senate staffers in Florida. Under current law in the Sunshine State, a borrower who takes out two 30-day, $500 loans owes $110 in fees.

“To us, that looks like you’re basically going backwards,” said Jared Ross, a senior vice president at the League of Southeastern Credit Unions & Affiliates, which opposes the legislation. “We view these types of loans as predatory.”

But the legislation’s supporters argued during two recent hearings that the bill would be good for consumers. For example, they noted that the Senate bill allows borrowers to skip a payment if they cannot come up with the cash. One speaker pointed out that customers who pay off the 60- to 90-day loans within two weeks will owe less in fees than payday borrowers.

Looming over the Florida proceedings was the CFPB rule released by then-Director Richard Cordray, one of his last major actions in the job.

In testimony to the Florida Legislature, consumer advocates noted that acting CFPB Director Mick Mulvaney, who was appointed by President Trump in November, has cast doubt on the rule’s staying power.

Last month, the consumer bureau announced that it was opening a rulemaking process to reconsider the regulation. Even if the rule survives, payday lenders are not required to be in compliance with most provisions until August 2019.

But Carol Stewart, senior vice president at Advance America, a payday lender based in Spartanburg, S.C., made the federal rule sound like a fait accompli, and presented the Florida legislation as a logical response.

“This legislation is not intended to skirt any rules, federal rules, that have been put in place, but to follow the path that the current CFPB rules have given us,” she said at a Jan. 16 hearing.

Payday lenders are a powerful force in Florida politics, and the industry-backed legislation is attracting bipartisan support.

Assuming it gets approved by state lawmakers, the measure will go to the desk of Republican Gov. Rick Scott. A political action committee associated with Scott, who is running for the U.S. Senate, has received $100,000 in contributions from Amscot Financial, a Tampa-based payday loan chain.

In Indiana, legislation would allow for a new category of three- to12-month consumer installment loans of between $605 and $1,500. Consumer advocates say that the APRs could be as high as 222%. Existing payday loans, which are capped at $605, would not be affected. The bill passed the Indiana House this week by a 53-41 margin.

For payday borrowers who get trapped in a debt cycle, the installment loans under consideration in Indiana could be a less expensive option. APRs on payday loans in the Hoosier State can be as high as 391%.

But Erin Macey, a policy analyst at the Indiana Institute for Working Families, worries that if the legislation is enacted, some cash-strapped consumers will borrow more than they need and end up in a deeper hole.

“We have heard from folks who’ve worked in the industry that they are encouraged to lend out the full amount borrowers qualify for,” she said, “in which case they will end up paying much more."

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Kevin Wack

Kevin Wack

Kevin Wack is a California-based reporter for American Banker who covers the U.S. consumer finance industry.