As the Consumer Financial Protection Bureau (CFPB) wades through the public comments about rules regarding payday lending, The Pew Charitable Trusts has weighed it with its own letter, this one urging the federal agency to reconsider the path its own. The letter is the latest salvo in an ongoing battle about the future of payday lending in the U.S.
The letter, dated May 15, is addressed to CFPB Director Kathleen Kraninger and comes from Nick Bourke, Pew’s director of consumer finance. The letter urges the agency to “rescind its 2019 proposal” regarding payday lending.
Rule Change
The agency in 2017 drafted payday lending rules under the tenure of Richard Cordray, who had served as the previous director of that agency. The Obama-era appointee sought to put in place new underwriting requirements for lenders (such as verifying borrowers’ ability to repay the payday loans). The rule also had another component, focused on how often a lender can try to debit payments from a customer’s bank account.
Kraninger, a Trump appointee, has proposed eliminating one of the components of the rules — the requirement that lenders would have had to verify a borrower’s income, debt and spending habits to assess their borrowing threshold before underwriting their loan — or avoid this stipulation by changing their loan type to an installment loan, paid over a set amount of time agreed upon at the outset of the loan.
Speaking with PYMNTS on Thursday (May 16), Bourke said that “we hope that after seeing how well-founded and carefully tailored the 2017 payday loan rule is, and how poorly supported the Bureau’s current proposal is, she and her staff will agree that preserving the original rule is the best thing for consumers and the market as a whole.”
According to Pew’s analysis of the proposed payday lending rule change, he said, “millions of people would suffer needlessly if the CFPB rescinds the 2017 payday loan rule, and the market for safer and more transparent installment loan products would be stymied. State and federal lawmakers would eventually have to resolve those problems.”
CFPB View
For its part, the CFPB has said there was “insufficient evidence and legal support for the mandatory underwriting provisions in the 2017 final rule. Additionally, the Bureau is concerned that these provisions would reduce access to credit and competition in states that have determined that it is in their residents’ interests to be able to use such products, subject to state-law limitations.”
Other groups, such as the Online Lenders Alliance (OLA), have praised the CFPB for the change of heart on payday lending — and for making sure that those most in need of credit have easy access to it.
“Our goal in this rule, or any regulatory action, is to ensure [that] people who need short-term, small-dollar loans can get them from safe, regulated, reliable lenders online. There is a need for credit among the vast majority of Americans who can’t afford a financial shock like a job interruption, medical emergency, or car or home repair,” said Mary Jackson, CEO of OLA.
Others have said that easing regulations will spur more competition among a wider variety of firms to build products that best serve consumers — not a return to “bad practices.”
Not only that, but Nicholas Gess, who serves as strategic litigation, risk avoidance and communications principal of Morgan Lewis Consulting, has told PYMNTS that the payday lending rule, as written, would likely have increased the costs of originating new loans and possibly “make them not economically viable,” while new proposals may look at lending through a “broader lens” that can in turn judge whether the loan products themselves are desirable.
The debate over the CPFB payday lending rule is not the only action going on when it comes to loans and consumer protection at the federal level. Last week, presidential candidate Sen. Bernie Sanders and freshman New York Rep. Alexandria Ocasio-Cortez made a lot of headlines with the Loan Shark Prevention Act — a big, wide-ranging piece of consumer protection legislation that would do two main things. First, it would cap the interest that could be charged by credit cards (and other forms of unsecured credit like payday loans) at a 15 percent annual percentage rate (APR). Second, the proposed legislation would turn roughly 30,000 post offices into providers of low-cost basic financial services, including checking accounts, savings accounts and some loans.
The debate over the payday lending rules is part of a larger struggle about the direction, purpose and powers of the CFPB, which was created in the wake of the 2008 financial crash.
Before Kraninger took over at the federal agency, there was Interim Director Mick Mulvaney, who, during his tenure, made his dissatisfaction with the regulations as written (now overturned) well known. When Kraninger was sworn in as the permanent head of the CFPB in December 2018, it was widely expected for the agency to soon announce a change in the proposed rules, and likely overhaul some of its more controversial points.
Some 26,000 comments have been submitted around the payday loan proposal In March a federal judge ordered a stay on the August 2019 compliance date tied to the “payday lending rule” mandated roughly two years ago by the CFPB. As the new letter from Pew shows, the debate over lending will continue, and probably keep going even after the rule change.
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