The Consumer Financial Protection Bureau took a long-expected move earlier this week, of continuing to be responsive to payday industry lobbying to free itself of an Obama-era reform, that of requiring the lenders to verify whether presumably-desperate borrowers had any capacity to pay these loans back. We’ve embedded the CFPB rule at the end of this post. This is the most important change:
The Bureau revokes the 2017 Final Rule’s determination that it is an unfair practice for a lender to make covered short-term loans or covered longer-term balloon-payment loans without reasonably determining that consumers will have the ability to repay the loans according to their terms. For the reasons discussed below, the Bureau withdraws the Rule’s determination that consumers cannot reasonably avoid any substantial injury caused or likely to be caused by the failure to consider a borrower’s ability to repay. The Bureau also determines that, even if the Bureau had not revoked its reasonable avoidability finding, the countervailing benefits to consumers and competition in the aggregate from the identified practice would outweigh any relevant injury.
Further, the Bureau revokes the 2017 Final Rule’s determination that the identified practice is abusive. The Bureau determines that a lender’s not considering a borrower’s ability to repay does not take unreasonable advantage of particular consumer vulnerabilities. The Bureau also withdraws the Rule’s determination that consumers do not understand the materials risks, costs, or conditions of covered loans, as well as its determination that consumers do not have the ability to protect their interests in selecting or using covered loans.
Help me. Having someone take a loan at what is often a 400% interest rate does not constitute taking “unreasonable advantage” of the borrower’s lack of mathematical savvy and/or desperation?
The now-dead rule had required lenders to verify monthly net income, debt payments, and housing costs plus basic living expenses to determine a debt to income ratio. That would seem to be Prudent Lending 101 but the industry would have none of it, particularly since the old rule made failure to do so “an unfair and abusive practice.”
It also isn’t hard to see that requiring a lender to implement normal creditworthiness tests, like verifying income and identifying other major payments the borrower has to make, like housing costs and other loan obligations, shouldn’t be controversial. But payday lenders don’t need their borrowers to pay off the obligation to make money. In fact, it’s all too well known that the point is to get them on a neverending payment treadmill. Only a subset, about 20%, do pay off their payday loan in 2 weeks per the CFPB’s own data. The rest get stuck.
Having said that, the rule revocation doesn’t amount to all that dramatic a change, since the Obama rules had not gone into effect. 18 states and the District of Columbia either bar payday loans or impose rate caps. But it still says a great deal about the US that predatory lenders are being freed of tame restrictions during the worst economic crisis since the Great Depression. About 12 million people had been taking out these loans in the old normal. What will those numbers become?
“Any kind of loosening of regulation during this pandemic, specifically around this COVID-19 crisis, is just really, really hard to swallow, knowing that people are struggling financially,” said Charla Rios, a researcher at the Center for Responsible Lending. “It feels like this rule has kind of opened the door for things to become even worse for a lot of consumers.”….
“The situation that you want to avoid is people that are getting in over their head and going into this cycle in which they’re taking out a loan, not paying it back, paying the fee again for the second loan, and again and again, until they’re paying back way more than they borrowed,” said Lisa Servon, a professor at the University of Pennsylvania and author of “The Unbanking of America.”
The rule the CFPB rolled back this week “would have helped prevent that from happening with more people.”
And from TwoCents:
According to the Pew Charitable Trust, the [former] rule was working. “Lenders were beginning to make changes even before it formally took effect, safer credit was already starting to flow and harmful practices were beginning to fade,” said Alex Horowitz, a senior research officer with Pew Charitable Trust’s consumer finance project….
“It is truly shocking that the CFPB, an agency created to protect families from financial abuses, is bending over backward to side with the most scurrilous lenders over the consumers it is supposed to protect,” National Consumer Law Center (NCLC) associate director Lauren Saunders said in a statement.
TwoCents also linked to a National Conference of State Legislatures compilation of state laws on payday lending, so you can see what rules apply in your state.
It looks as if we’ll have to go through another period of consumers getting crushed by abusive loans before there’s another opportunity to restrain these practices. In the meantime, why has only the former head of the CFPB, Richard Cordray, and not Elizabeth Warren herself, called attention to this payday loan gimmie? Even if the issue is dead on the Federal level, some noisemaking might move state-level efforts forward.00 cfpb_payday_final-rule-2020-revocation