T-minus five days and counting.
That’s how many days are left for the public to comment on the CFPB's draft payday lending regulations. First proposed in early June of this year, the rules changes have been divisive from well before the word go.
Much of the first half of 2016 saw proponents and opponents of the forthcoming regulations arguing vehemently about whether and how much the CFPB should regulate and modify the short-term lending industry. The actual release of the proposed ruling didn't do much to quell the argument.
Well, that’s not entirely fair.
With the release of the CFPB's draft rules, there was actually something of a meeting of the minds between the short-term lending cheerleaders and jeerleaders. They mutually agreed that the CFPB had done a less-than-stellar job in the first pass.
“The CFPB is missing a big opportunity to encourage safer and more affordable loan options,”Nick Bourke of the Pew Charitable Trusts told PYMNTS the day after the news broke. Pew is generally a pretty enthusiastic supporter of CFPB regulations but, in this case, found that the consumer protection group was "missing the mark."
That sentiment was echoed by Jamie Fulmer, Advance America’s SVP for public affairs. Advance America is the nation's largest payday lender.
"The CFPB isn’t acknowledging that there is a legal, regulated industry and illegal scam artists,” Fulmer noted. “They paint the whole industry with the same broad brush that focuses on the actions of illegal operators.”
Both noted that the CFPB has some responsibility to give consumers what they want, which is reasonably transparent and swift access to short-term funds when necessary. From there, the points of agreement did — and have — diverged.
While there is, and was, broad agreement that the CFPB should ensure the existence of a legal and regulated payday loan industry, the right road to get there has been a particularly contentious topic among consumer advocates, industry representatives, financial services experts and legislators.
Especially legislators, particularly those in the House of Representatives — the home of some of the more colorful commentary on the payday loan issue through 2016. Fans of the regulations have referred to the "vile depredations" of the short-term lending industry, while opponents waxed philosophical about the CFPB's firm desire to "trample on sovereignty of both consumers and Native American tribes."
And coming down to the wire on the open comment period on that first draft of the regulations, members of the United States Congress are once again getting spun up on the issue and writing sternly worded letters admonishing the CFPB to either pass much, much more stringent and limiting regulations or admonishing the CFPB to scale back its "already overextended" reach into this area.
This isn't getting any less divisive anytime soon.
Those Who Want More
"Though we applaud the CFPB for taking the necessary first steps to address predatory practices in the small-dollar credit market, we urge you to adopt a final rule with additional protections that will ensure responsible lending," said a letter signed by the over 100 House Democrats last week to to CFPB Director Richard Cordray, urging him to consider more stringent underwriting requirements for short-term lenders. Among the signatories is Maxine Waters, the ranking Democratic member of the House Financial Services Committee.
Specifically, the group would like to see the CFPB require that all lenders assess borrowers' ability to repay a loan, for loans of any amount. The rules as currently formulated do not require such scrutiny of loans under $500 through the "principle payout option" that also limits the lender to only providing up to two extensions if they cannot repay the original loan in 30 days.
"The bureau's adoption of an ability-to-repay principle based on a borrower's income and expenses is critical to ensuring fairness for consumers," the letter said. "We also encourage the bureau to enact stronger protections against consumer abuses in the small-dollar industry by closing loopholes that would allow borrowers to take out multiple loans in succession or provisions that would reduce the cooling-off period."
Legislators are also concerned the CFPB's new rules could accidentally undermine strict protection already in place in certain states. For example, by law, the CFPB can not cap interest rates, but states can and, in some cases, have.
"The final CFPB rule should strengthen and support these strong consumer protections by affirming the importance of strong state laws that protect consumers from the harm caused by triple-digit interest rates," Democrats wrote.
The group of 100 House Democrats would also like to see the APRs on short-term loans capped at 36 percent and noted that, among the structural problems with the rules as written currently, it is still relatively easy for short-term lenders to charge "triple-digit APRs."
Those Who Want Less
Director Cordray will have his reading lineup full in the run-up to the Friday deadline, as the letter urging for stronger regulations was one of two sent along last week. A small group of House Republicans and Democrats also wrote last week to almost entirely urge the opposite of the first letter.
The letter, signed by six Democrats and six Republicans, noted the rules as written "severely restrict access to credit that millions of Americans rely on."
The letter also noted that part of the CFPB “protection mandate” is to make sure that “all consumers have access to markets.”
“I co-sponsored an amendment during mark-up of the Financial Services & General Government Appropriations Act for Fiscal Year 2017 that would put this proposed rule on hold until we analyze how it would impact consumer access to credit and identify what other sources of credit may be available for those in need of short-term, small-dollar credit products, ensuring that the CFPB is maintaining their statutory responsibility under Dodd-Frank to not restrict consumers’ access to credit," Rep. Henry Cuellar (D-TX) noted to PYMNTS in an emailed comment.
“This rule from the Consumer Financial Protection Bureau is estimated to restrict access to nearly 80 percent of small-dollar loans, putting tens of thousands of people out of work and leaving millions of Americans without viable alternatives to access credit to either make ends meet or deal with unforeseen emergencies. I encourage rules to do away with deceptive lending practices; however, this rule appears to fail at safeguarding many people’s much-needed access to credit.”
The sentiment was reflected in the group letter, stating that the CFPB is removing a product that is often a consumer life raft and offering no meaningful way for those consumers to access credit. The best case, the letter noted, involves going without; the worst case can involve taking a loan from an illegal lender or loan shark.
“With a decimated short-term, small-dollar lending industry and other financial service providers not able to fill the void, millions of working class Americans will be left with no viable alternative to access the credit they occasionally need to make ends meet,” the letter said. “The adverse effects of this proposal on consumers will be devastating.”
Whichever side of this one comes out on, it is largely inarguable that consumers who need payday loans will feel the effect far more than any other group and will live with the outcome of the decision in a more direct way than almost anyone else.
And yet, for all the hysteria about payday lending, it is worthing noting how few complaints the industry actually draws year in and year out. As the CFPB data over the last five years demonstrates, consumers rarely complain about payday lending. Mortgages get lots of complaints, so do credit rating agencies and debt collectors. Payday lending gets so few that the CFPB categorizes them in the general category of "other," and it is the second smallest area of complaint.
But changes are coming no matter how anyone feels and no matter how the facts line up, and as of Friday, the time to offer a POV on the issue will be over.
We'll keep you posted on how — or even if — the CFPB changes anything going forward.