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By Jerri-Lynn Scofield, who has worked as a securities lawyer and a derivatives trader. She now spends much of her time in Asia and is currently working on a book about textile artisans.
The Consumer Financial Protection Bureau (CFPB) issued its long-awaited payday lending rule on Thursday, requiring a lender to do an ability to repay test before awarding a loan, and making it more difficult for borrowers to rollover these typically short term, high interest loans.
The new rule is the first comprehensive attempt at federal regulation in this area, and would replace the current state-based regulatory patchwork under which some states already have controls on payday lending in place.
The payday lending industry preys on the poorest financial consumers. One factor that has allowed it to flourish is current banking system’s inability to provide access to basic financial services to a shocking number of Americans. Approximately 38 million households are un or underbanked– roughly 28% of the population.
Now, a sane and humane political system would long ago have responded with direct measures to address that core problem, such as a Post Office Bank (which Yves previously discussed in this post, Mirabile Dictu! Post Office Bank Concept Gets Big Boost and which have long existed in other countries.)
Regular readers are well aware of who benefits from the current US system, and why the lack of institutions that cater to the basic needs of financial consumers rather than focusing on extracting their pound(s) of flesh is not a bug, but a feature.
So, instead, the United States has a wide-ranging payday lending system. Which charges borrowers up to 400% interest rates for short-term loans, many of which are rolled over so that the borrower becomes a prisoner of the debt incurred.
How Common Is Payday Lending
How common is payday lending? The New York Times reported on Thursday:
The payday-lending industry is vast. There are now more payday loan stores in the United States than there are McDonald’s restaurants. The operators of those stores make around $46 billion a year in loans, collecting $7 billion in fees. Some 12 million people, many of whom lack other access to credit, take out the short-term loans each year, researchers estimate.
Not a bad business to be in, it seems– or at least ’til the CFPB rules came down.
Who Is in the Payday Lending Business?
Well, few regular Naked Capitalism readers will be surprised to find some of the sleaziest of swamp creatures: our old private equity friends. Over to The New York Times again:
The biggest companies in the payday industry are nearly all owned by private equity firms. Mainstream banks and publicly traded companies, scared off by a regulatory crackdown and bad publicity, have left the market in recent years. The largest remaining chain, Advance America, which has 2,100 locations in 28 states, is owned by Grupo Salinas, a Mexican conglomerate.
The new rule “completely disregards the concerns and needs of actual borrowers,” said Jamie Fulmer, an Advance America spokesman. “President Trump and Congress must intercede to protect American consumers.”
So, the new CFPB Rules Are Good News, Right?
The Grey Lady certainly seems to think so:
[…T]he restrictions would alter the short-term lending market severely, with the number of such loans made probably falling at least 55 percent, according to the consumer bureau’s projections.
The industry’s forecasts of the rules’ impact are starker. The total sum lent would plunge by nearly 80 percent, according to a simulation run by Richard P. Hackett, a former executive at the consumer bureau who is now an adviser to Clarity Services, a credit bureau that focuses on subprime borrowers.
A dropoff of that magnitude would push many small lending operations out of business, lenders have said. The $37,000 annual profit generated by the average storefront lender would become a $28,000 loss, according to an economic study paid for by an industry trade association.
My response: Not so fast.
The new rule is clearly a short-term battle won, and the CFPB deserves some credit for finally getting the rule out. But this is a long-term war.
Here are some reasons I see the agency’s move as a reason to sip a small glass of your favourite tipple (and certainly provides no excuse to quaff the whole bottle).
First, the rules do indeed crack down on payday lending, but the CFPB had initially taken a more aggressive position– and walked that back after unprecedented industry pressure (more on that unprecedented in a moment). Again, over to The New York Times:
After months of lobbying, the industry won one significant concession: The bureau dropped a proposal it made last year to require strict underwriting on many consumer loans with an annual percentage rate higher than 36 percent. Most of the rules announced on Thursday apply only to loans with a term of 45 days or less.
Now, when I say unprecedented, what do I mean? Well, the Wall Street Journal reported in a story headlined The Hand-to-Hand Combat to Save Payday Lending
Florida payday lender Amscot Financial Inc. in the summer of 2016 rounded up about 600,000 letters from customers protesting a regulator’s plan to clamp down on high-interest loans. The letters, many handwritten, were scanned, packed in 131 cartons and shipped to Washington.
The Amscot effort helped boost the total comments received to record levels:
The CFPB received 1.41 million comments on the payday rule during the comment period between July and October 2016—by far a record for the six-year-old bureau.
In addition to the reams of paper comments, experts say the total was boosted by the use of software that prewrites comments for people to submit electronically.
Vulnerable to Congressional Review Act
A second reason I think bacchanalian celebrations might be premature is that the CFPB’s slow issuance of the new rule renders it vulnerable to a challenge under the Congressional Review Act (CRA) (as I discussed in this post, Payday Lending and the CFPB: Another Pending Cordray Fail).
Congressional Republicans and Trump have used the CRA to roll back regulations enacted during the waning days of the last administration (see this post, Trump and Congress Use Congressional Review Act to Roll Back 14 ‘Midnight’ Rules; More to Follow?
But CRA procedures could equally be applied to any agency regulation that might be promulgated during the Trump administration.
Recall that CRA provides expedited procedures for passing legislation rescinding any regulation that was finalized in the preceding 60 session days, by simple majority votes in each chamber of Congress. Once a CRA resolution of disapproval is signed by the President, the rule is rescinded. And crucially, the agency is then barred from issuing a rule again on the same substance, absent new authorizing legislation.
If the payday rule had been promulgated in a timely manner during the previous administration it would not have been as vulnerable to a CRA challenge as it is now. Even if Republicans had then passed a CRA resolution of disapproval, a presidential veto would have stymied that. Trump is an enthusiastic proponent of deregulation, who has happily embraced the CRA– a procedure only used once before he became president to roll back a rule.
Now, the Equifax hack may have changed the political dynamics here and made it more difficult for Congressional Republicans– and finance-friendly Democratic fellow travellers– to use CRA procedures to overturn the payday lending rule.
The New York Times certainly seems to think prospects for a CRA challenge remote:
The odds of reversal are “very low,” said Isaac Boltansky, the director of policy research at Compass Point Research & Trading.
“There is already C.R.A. fatigue on the Hill,” Mr. Boltansky said, using an acronymn for the act, “and moderate Republicans are hesitant to be painted as anti-consumer.
I’m not so sure I would take either side of that bet.
Industry Legal Challenge Is Inevitable
Even if a CRA challenge is not made, industry groups will almost certainly file a lawsuit challenging the rule. As the Wall Street Journal reports in New Federal Rule Clamps Down on Payday Loans
The payday rule is likely to face legal challenges from the industry, which has complained the bureau failed to pay sufficient attention to comments sent in by hundreds of thousands of payday customers opposing the rule.
The industry was clearly looking ahead to this possibility when it solicited and submitted the hundreds of thousands of so-called comments from the “public” on the rule.
Another highly touted, recently issued CFPB rule– banning mandatory arbitration– remains vulnerable to CRA– as I discussed in House Votes to Overturn CFPB Mandatory Arbitration Ban. While the Equifax hack may indeed have made an overturn less likely, it’s too soon to know whether that’s a good call. Since the 60-day window for using the CRA process is based on “session days”– the deadline for overturning this rule falls sometime around Thanksgiving. We’ll see if Congress and Trump follow through and try to serve up this turkey.
Business groups have elected not to wait and see and have followed a lawsuit seeking to upend the mandatory arbitration rule. As the Wall Street Journal reports in Business Groups File Lawsuit Against CFPB’s Arbitration Rule:
The groups— a range of finance trade groups and the U.S. Chamber of Commerce— are fighting a rule released in July barring fine-print requirements in financial contracts for customers to use arbitration, rather than the U.S. legal system, to resolve complaints. The lawsuit comes as Senate Republicans are scrambling for the 50 votes they need to overturn the CFPB rule with legislation.
This industry lawsuit backstops these CRA overturn efforts. Meaning if the CRA is used to overturn the rule, the lawsuit is moot.
I want to reiterate that the CRA prevents the agency from revisiting the subject of the rule again, unless and until new implementing legislation is enacted.
Office of the Comptroller of the Currency and Deposit Advance
As Maria says in The Sound of Music (or was it the Reverend Mother?) IIRC, the Lord never closes a door without opening a window. Well, while the CFPB appears, at least for the moment, to have closed the door on a chunk of payday lending, the Office of the Comptroller of the Currency (OCC) has opened the way for a different group of financial institutions to ring changes on a similar theme.
So, as the American Banker reports in As CFPB closes door on payday, OCC opens one for deposit advance, less than an hour after the CFPB announced its payday lending rule,:
[T]he Office of the Comptroller of the Currency surprised the financial services world by making its own move—rescinding guidance that made it more difficult for banks to offer a payday-like product called deposit advance.
The dueling moves effectively mean that the CFPB was closing a door in one area, while the OCC opened its own for national banks.
The OCC billed its decision as one intended to avoid duplication with the CFPB’s efforts.
The American Banker predicts:
Ultimately, the moves will leave the financial services more fragmented. Payday lenders have already begun making longer term loans, ones that are 45 days or longer, which the CFPB rule does not cover, in response to the final rule. (An earlier proposal would have covered those loans too, but that part was not finalized and the CFPB says it needs to study the issue.)
Nationally chartered banks, meanwhile, are now free again to offer deposit advance products, while state-chartered institutions subject to Federal Deposit Insurance Corp. supervision still face limitations on such loans. The OCC and FDIC acted in concert earlier to rein in deposit advance products, but only the OCC rescinded its guidance on Thursday. It was not immediately clear whether the FDIC would follow suit.
The OCC failed to give the CFPB any notice it would be taking up the deposit advance issue.
The CFPB’s payday lending rule is a long overdue effort to stamp out a particularly extreme form of financial predatory behaviour. But the rule is not as broad as it should be, and I’d hold off on excessive celebrations until it’s clear whether the CRA will be invoked, and the inevitable legal challenges survived.