The final payday lending rules are coming, but reporting by The Wall Street Journal over the weekend suggests that they may not take quite the toll on the lending industry as once thought. The Consumer Financial Protection Bureau (CFPB), it seems, is considering proposals that would scale back the rule’s scope.
Instead of casting the net very, very wide to include all short-term lending in total, the new rule will instead focus on small-dollar loans with a term of about two weeks. Known more commonly has payday loans, these loans are differentiated from a similar product, installment loans, which tend to last for 45 days or more.
Both loans carry high costs — annual interest rates for both payday and installment loans quickly run into the triple digits — but the payday variety is what has earned more of the CFPB’s ire. It’s also become their focus as they are hoping to get legislation in and finalized before a new director takes over.
But Doesn’t Director Cordray Have Another Year?
Richard Cordray, the CFPB’s current director, is a 2012 Obama appointee and one with a good deal of power to act independently, given the unique structure of the CFPB. His five-year term technically runs through July of next year.
But rumor has it that Cordray, who certainly will not be reappointed by President Trump, has already scoped out his next job: being the state of Ohio’s next governor.
The rumors at this point are just that: rumors. However, Cordray-watchers have been noting things like the not-so-coincidental engagement at the AFL-CIO’s Labor Day picnic in Cincinnati and an op-ed titled “Let Consumers Sue Companies” for The New York Times on Aug. 22 defending the arbitration rule. To the chattering classes in politics, it sure looks like Cordray is preparing for a run.
And Representative Jeb Hensarling (R., Texas) — Cordray’s arch nemesis in Congress and the chair of the House Financial Services committee — has also spent much of 2017 offering a running commentary on Cordray’s potential gubernatorial bid.
“[I’m] surprised to see you here in that, as you well know, there have been many press reports saying that you would have otherwise returned to Ohio to pursue a gubernatorial bid. Perhaps the rumors of your political aspirations are greatly exaggerated,” Hensarling said to Cordray during a hearing in the House in April.
In July, Hensarling accused Cordray of violating a law that prohibits federal officials from running for partisan political office.
For his part, Cordray has said nothing about these rumors.
But he and the crew at the CFPB are working overtime to make sure that they can get a short-term lending rule in place by September — even if it isn’t quite as stringent a rule as they were once proposing.
The New, New Rule
The CFPB has no official comment on the rule’s content, though it has been confirmed through a spokesperson that the process of reviewing and publishing public comments is nearly complete. That tends to indicate the rule-making process is winding to a close.
Unnamed sources also indicate that the new rule is also being peer-reviewed by the other federal regulatory bodies that control banking: Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp (FDIC). Both the OCC and FDIC have made no official comment.
“We are expecting the rule anytime,” said Dennis Shaul, chief executive of the Community Financial Services Association of America, the primary industry group for payday lenders. “They are very far along in their process.”
The payday lending industry has expressed trepidation about the new rule and has lobbied hard against it. Lenders complain that the legislation as proposed by the CFPB would push as many as 85 percent of the firms in the payday lending business out of the market overnight. And while that might be the goal, making payday lending de facto illegal by creating regulatory hurdles that almost no lender can clear, industry representatives note, leaves the roughly 10 million to 12 million people who take out payday loans without access to credit.
Those borrowers, the data has shown, are borrowing to meet needs like bill payments and car repairs. If the $40 billion or so a year lent out by the industry suddenly disappears, there is no reason to think the need for those funds will disappear along with it, which means consumers may well be driven to illegal and black market lenders, whose tactics for collection are usually a good deal harsher than the average payday lender’s.
Advocates of payday lending regulation have shot back that the lenders themselves push loans onto consumers in such a way that they are designed to become “debt traps” that force frequent renewals and rollovers and an ever-escalating menu of fees.
As of the last known iteration of the plan, payday lenders would be required to assess a borrower’s ability to repay. They would also face limits as to how often a loan can be rolled over.
The operating speculation now is that the CFPB will roll out short-term lending rules that cover payday loan structures with extremely short repayment times. Sources believe the CFPB may issue a separate rule to address the longer-term loan market. Those rules might well need to be more complex, as they affect a larger range of lenders, including banks and credit unions.
The Feedback So Far
Firms such as World Acceptance Corp. and OneMain Financial — which are small dollar personal lenders, but their loans are repaid over a long duration via installments — are more than a little elated over the prospects of such a rule change.
“Th[at] would be a validation by the CFPB of what we’ve been demonstrating for years: that traditional installment loans are beneficial to consumers,” said Chris Stinebert, chief executive of the American Financial Services Association, a trade group for installment lenders.
Consumer watchdog groups — opponents of short-term lending — have also backed a two-stage approach to personal lending.
“I think it’s a major step forward,” said Ed Mierzwinski, federal consumer director at advocacy group U.S. PIRG. “If we can rein in one part of the industry but not the other, why not?”
Some say a rule focused on short-term loans could face problems. Even passed, it could face the same kind of concerted effort at overturning that the CFPB’s recent arbitration rule now faces. The Congressional Review Act gives Congress broad powers to strip CFPB rules (within a certain time frame), which not only stops the rule from going into effect, but also blocks future rule-makings for the next several years.
If the rule survives and becomes effective, the CFPB’s new leadership, which will be taking up residence next summer, could decide not to enforce it.
Payday lending has had a long and difficult 18-month journey with the CFPB, one that is not nearly over yet.
We’ll keep you posted on the progress.