Let the Predation Begin! CFPB Rolls Back Obama-Era Payday Loan Protections

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?

From Marketplace:

“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.

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18 comments

    1. greensachs

      Maybe this is just another “free market” example. Similar in that market “freedom” doesn’t allow them to move lower…servituding for liberty and justice.
      Glaring gaudy greed and extravagance is blinding indeed. Yet, in full view for all to see.

      Reply
    1. ddt

      Worked for a construction company in Greece back in the 90s as a 20 something. During a cash crunch and temporary inability to roll over credit, I remember my boss visiting the local loan shark (and me accompanying him so I could come back, get the cash when it was ready and go deposit in the appropriate bank accounts to cover outstanding debt). The guy was the neighborhood butcher… Thanks for jiggling this memory.

      Reply
  1. Tim

    The recent Supreme Court ruling which was headlined as a rebuke to the CFPB actually has enormous implications to this and the CFPB overall. In reality, the only aspect of the CFPB portion of the Dodd-Frank Act that was struck down was that the CFPB director would have a five-year term and could not be removed by the President (without serious cause) during that term.

    This was deemed unconstitutional by the court and now the CFPB director can be removed by the President without cause at any time.

    The Trump Admin wisely rook its time replacing Rich Cordray, Obama’s nominee, who left the CFPB to run for governor in Ohio. Prior to the court ruling, Director Kraninger, who took office at the beginning of 2019, would have kept the job until 2024 – three years into the next administration. If the Democrats win in November, she will be out on her ear in January 2021, and the newly appointed director can reverse her multitude of sins almost overnight. The CFPB is unusual in vesting a sole director with the power to implement new regulations and tear up old ones.

    In challenging Dodd Frank and the CFPB the way it did, the right hung itself on its own petard. The payday loan issue wouldn’t have much impact on this presidential campaign so the plan is likely to let sleeping dogs lie until January when Trump’s damages can be quickly reversed.

    Reply
    1. Yves Smith Post author

      Sorry, that isn’t the reason. Did you miss that we said the Trump Administration CFPB hadn’t implemented the Obama rule change?

      This was exactly what the CFPB was expected to do before the Supreme Court ruling. The payday lending industry was lobbying very hard. And by contrast, I saw absolutely zero in the way of pushback in the usual leftie outlets. Whatever activist pushback there was apparently was done only by the few orgs specifically on this beat.

      It would have been an uphill battle to block the rollback but a concerted effort might have been able to preserve a lower level of borrower protection.

      Reply
  2. John Mc

    This is so disturbing on so many levels:

    Hey Americans? This is Neoliberalism.
    The NL demise has been greatly exaggerated in the last 6 months. Don’t mind me while

    1. Political class practitioners rely upon the market to sort life/death/$ outcomes during a pandemic
    2. Pass/fund a CARES Act that allocated millions to Grover Norquist (bathtubs and masks scarcity)
    3. Fail to respond to one of the biggest cultural phenomena of our lifetime (BLM) beyond Kente Clothes
    4. Try to invade Venezuela with BB gun flotilla and a soulless dark mist called Elliot Abrams
    5. Child trafficking ring exposed amongst the very rich/powerful without talking about child trafficking
    6. Foreign policy ideas involve blaming Russia, going to war with China, and avoiding Bevins Jarkata Method
    7. Alan Dershowitz and his mucus-like PR blob decide to go on a Tete-offensive sans tete
    8. Cancel culture, white fragility and propaganda dot our body politic like a melanoma on Uncle Sam’s butt
    9. Stock markets reflect insanity instead of reality
    10. Huge percentage of renters have not paid rent in 3 months – Evictions/Foreclosures are coming
    11. We have a manufactured battle in this country (masks versus freedom from masks or CoVid +)
    12. David “f-ing” Frum is voting democrat (shakes like the San Andreas Fault)
    13. Harvard still charging $50K/year for tuition (wink wink, credential signaling)
    14. Deaths from CoVid-19 are discussed like a daily statistic or something that happens over there (pathetic)
    15. Choice between asshat 1 and asshat 2 in the Presidential election
    * they represent the see-no-evil, hear-nothing-but-evil, speak out of their rectums duopoly

    There are so many examples: night of 1000 knives as Lambert refers to it, or Pelosi/Schumer Russiagate shuffle featuring Adam Schiff, or Wisconsin/Illinois CoVid-19 Primaries, or …….

    But it is fitting that we are almost to Bastille day, and the next thought on the NL’s list is to repeal/amends previous payday lending regulations.

    What a legacy we are leaving…. doomed to repeat the fall of the Roman Empire….

    Reply
  3. flora

    disclaimer: I’m not and economist, not very financially literate, not a gold bug, and only have a fuzzy grasp of MMT.

    Explaining how MMT works esp with finance makes sense to me.

    FDR took the US off the gold standard internally in 1933 which gave the govt more room to inflate the money supply during the depression. The govt itself kept large gold stores which back the dollar by the value of whatever the govt decided. $35 oz was the final decided price, but that was higher than previous and so more dollars could be issued.

    In 1971, Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus completely abandoning the gold standard.
    (I am not a gold bug.)

    Now the dollar was entirely fiat both nationally and internationally, with no commodity to back it, only govt promises. At the same time the financial sector took off growing more than any other sector of the economy. We’ve seen two major financial disasters in the past 12 years. The govt both times responded with nearly unlimited MMT-type spending into the financial sector and connected corporations but mostly ignored Main Street even as Main Street goes deeper and deeper into debt. (And now this payday loan (sharking) cossetting by the govt.)

    So here’s my meta question. Remember that I’m not a gold bug and I’m not terribly financially literate, so please don’t laugh too loudly when you read this. ;)

    What if,instead of gold or oil being the commodity that backs the nationally or internationally accepted value of the dollar, what if it is Main Street’s debt and the future labor required to pay that debt off that has been commoditized to back the dollar. What if the US financial sector has found a new “commodity” to back the dollar and that commodity is Main Street’s debt obligations? All these bailouts never get to Main Street and don’t cause inflation. Very odd, that. I notice the govt is quick to bailout all the large corporate and big bank debts but leaves the rest of us working harder and more desperately to pay our debts; MMT for the bigs, backed by our labor/debt obligations and no MMT for Main Street? Call it the labor theory of value for the dollar itself, sort of.

    This is probably a wacky idea.

    Reply
    1. flora

      adding: the US populists of the late 1800s wanted to take the US off commodity (gold or silver) backed currency. They adopted large parts of the Greenback Party’s platform.

      They couldn’t know modern financial engineering would do as much damage to Main Street using fiat dollars – greenbacks – as was done with gold and silver backed dollars.

      Reply
  4. Carla

    Excellent piece, Yves, although I would quibble with your title. The Predation began a LONG time ago. Maybe start with “Ramp Up the Predation!” or “Take Predation to a Whole New Level!”

    And Liz Warren? What a damp dishrag she is.

    Reply
  5. Tim Duncan

    That’s an inappropriate insult to use towards any women to begin with.
    Also, Warren has done enough good in this country that you might consider being a little more articulate if you have a criticism of what she has or hasn’t done rather than just resorting to the kind of imbecilic name-calling that we’ve grown used to from Trump. I, for one, am sick of it.

    Reply
    1. Yves Smith Post author

      Please tell me exactly what good she has done. As far as I can tell, it ended when she was head of the Congressional Oversight Panel. Matt Bruenig has debunked her entire Two Income Trap as being based on fundamentally incorrect data construction/analysis of household expenses. She’s a Republican who believes in markets and thinks the answer to predatory behavior is better disclosure and regulators who collect data. Her “cop on the beat” was all empty talk. Her CFPB didn’t even get a decent-sized fine for the Wells Fargo abuses….oh, and it was the LA DA’s office that developed that case, not the CFPB. They didn’t find the misconduct when they had tons of complaints in their own database!

      Here she was, the premier bankruptcy professor in the US, and when she become Senator, not once did she advocate the quickest fix for the student loan mess, making them (again) dischargeable in bankruptcy. That tells you how her brave talk is an empty show.

      And WTF re your ridiculous first comment Are you seriously saying women are such precious flowers they can’t be criticized?

      Reply
  6. Tim

    Your analysis would be wonderful if it was applicable to the real world. Warren is not writing some obscure blog somewhere, she has and does operate in a tough political climate that generally opposes almost every idea she has. I agree with you on bankruptcy reform and so does Warren if you read her statements. Unfortunately she has never been in the Senate when the Republicans didn’t control it. Do you really think bankruptcy reform for students has a chance when people like DeVos are in power?

    And no, what I was commenting on was not a criticism, it was a rude and unnecessary insult using a vulgar term that men often use to demean women but apparently you’ve gotten so out of touch you are not aware if what it means.
    https://www.urbandictionary.com/define.php?term=Dish%20Rag
    I’ve been a reader and contributor for many years and used to think this was a blog that trafficked in ideas and discussion rather than almost cultish ideology . I’ll be spending my time in better ways in the future. adios

    Reply
    1. flora

      I agree with you on bankruptcy reform and so does Warren if you read her statements. Unfortunately she has never been in the Senate when the Republicans didn’t control it. Do you really think bankruptcy reform for students has a chance when people like DeVos are in power?

      That sounds like the argument Democrats use for keeping their powder dry: we probably can’t win so we won’t try. Obama was (in)famous for starting his negotiations with the GOP senate by conceding half his supposed position to them at the start, before the first real fights happened.

      Some reasons to fight for political policies even if the odds are against you: to represent your voters actual interests vocally, to find and refine your arguments, to find your allies, to increase public awareness of the issue and hopefully vocal public support. Instant gratification is almost never on offer in politics. Things take time. The terrain needs to be changed in many cases, and arguing strongly for better policies can change the terrain, maybe only by inches but every bit counts.

      But our current Dem estab would rather keep their powder dry or engage only in dog-and-pony shows of #resistance while giving T basically everything he asks for behind closed doors. imo Which suggests to me that the Dem estab is in agreement with these policies but can’t really say that too oftern because it would be off-brand.

      Reply
    2. Yves Smith Post author

      You clearly have a reading comprehension problem or are delusaional. There is not nor was there ever a “vulgar term” is this post. And the criticism in the post was mild. And you go on tilt over that?

      And this is not about what Warren passed. It is about what she advocated for. She did bother advocating for deminimus changes in student loan interest rates, or did you manage to miss that? You appear not all that familiar with her record. By contrast, Sanders has consistently pushed for a $15 minimum wage and managed to cow Amazon into implementing it without getting a bill passed. And he’s managed to get the idea of single payer out of the policy wilderness and enough into the debate that the Democrats have to expend energy trying to beat it back.

      And the idea that you can hold us hostage for a donation is rich. We aren’t for sale.

      Reply
      1. Massinissa

        I think he meant his original comment as a reply to Carla’s comment. She called Warren a ‘dish rag’ in a post above earlier, though I think she was using a different definition than the one Tim is upset about.

        Reply
    3. Massinissa

      Tim, your comment above wasn’t a reply to Carla’s post, so Yves thought you were talking about the article itself. This is partially a misunderstanding. Not that that particularly matters, but still.

      Reply

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