The Regulatory Future Of Payday Lending

Morgan Lewis Principal On Payday Loan Debate

Payday and short-term lending is a contentious topic in the United States, particularly when it comes to its regulation. The loans, usually for small-dollar amounts and short terms, are hailed by supporters as necessary tools for consumers facing a financial burden, such as an unexpected car repair, with few options for meeting the expense. Opponents of the practice, on the other hand, point to the typically high borrowing costs associated with the loans, and argue that they are more likely to harm consumers than help them in the long term.

Almost everyone – state law makers, federal law makers, consumer groups, industry groups and even short-term lenders themselves – agree that the industry should be regulated. There is a broad consensus that clear, reasonable and transparent rules are good for everyone involved.

On the other hand, how those regulations should be written, who should be writing them and how restrictive they should be are all very contentious topics, where board agreement is rare.

But despite frequent disputes and ongoing debates, the regulatory landscape has changed tremendously, particularly on the state level, over the last five to 10 years. Most recently, Ohio capped off a 10-year regulatory project two weeks ago, with John Kasich’s signature on a new bill that will close loopholes in 2008 legislation to legally rein in short-term lenders.

And national regulations are also moving forward this week, with a win in a U.S. federal court – though their final content remains a bit of an unknown.

New Rules in Ohio

Ohio’s House Bill 123 officially exists to close a series of loopholes that existed under the state’s previous attempt at regulating the short-term lending industry, the 2008 Short-Term Loan Act.

Under the newly passed and signed regulations, loans cannot exceed $1,000, and monthly payments on loans that are offered for 90 days or less cannot exceed 6 percent of a borrower’s income. Payday lenders must also register as such, closing down a provision that had allowed them to register as mortgage lenders in the past.

“This bill as it’s amended from the Senate opens up the Short-Term Lending Act law and allows payday lenders to be licensed as they actually are, payday lenders,” Rep. Kyle Koehler (R), a bill sponsor, said prior to passage.

Borrowers will also have the ability to cancel a loan and return all funds within 72 hours of agreeing to the loan – and consumers can repay a loan at any time, without penalty and with a guarantee of being paid back pro-rated fees and interest. Under the law, consumers will not be allowed to take out more than one loan at once.

H.B. 123 was not exactly new legislation – it was kicked around the Ohio statehouse for over a year before it was pushed forward rather quickly due to pressure from the investigation of former Ohio House Speaker Cliff Rosenberger. He resigned in April after it became known that he was the subject of an ongoing FBI investigation for campaign finance violations. Particularly under scrutiny, according to reports, is international travel taken with payday lending lobbyists.

Local media has reported that during the Rosenberger speakership, H.B. 123 spent about a year languishing in committee without a single hearing. Once Rosenberger was out – and Ohio state Republicans were looking for a fast way to clear the taint of scandal before the 2018 election season – H.B. 123 quickly became a bi-partisan favorite, and moved quickly through both houses and to the governor’s desk.

However, though the bill passed both houses of the state legislature and won the governor’s immediate signature, it was not without opponents in Ohio, who were concerned that the perhaps well-intentioned laws were more likely to harm the consumers they were designed to help.

A payday lending industry association in Ohio told Bloomberg that H.B. 123 will effectively cut off credit to a million of the state’s poorest citizens, and during the debate some Ohio Reps and Senators argued that the bill was illegally limiting the rights of consumers.

“Can you imagine if we were to … pass a law to say that all banks must give their customers three business days in which to put sufficient money in their accounts before the bank can charge a bad check charge on their account? I’m sure the banks would not appreciate such legislation,” Rep. Bill Seitz (R) said in floor debate. “After all, as they said in ‘The Godfather,’ we are not communists.”

Proponents of the law say that opponents are overestimating harms to both the industry and consumers, noting that the new Ohio law is modeled after Colorado’s 2012 short-term lending law, which has far from shut down the industry in that state.

“We are excited that we finally brought real payday lending reform to the state of Ohio after 10 long years of unlicensed payday lenders operating through the loophole and taking advantage of borrowers in Ohio,” Rep Koehler noted.

Meanwhile, on the Federal Front…

Though the CFPB dropped their final payday lending regulations last October, their ultimate fate and shape have been something of an open question since the agency formally went under new management in late November 2017.

New Acting Director Mick Mulvaney announced in January of this year that the CFPB intended to take a look at the payday lending regulations it had dropped a few months ago, with an eye toward revision.

Three months later, however, a payday lending trade group, the Community Financial Services Association of America (CFSA) filed a lawsuit against the CFPB to stop the regulation, saying it will kill the industry.

“We do not take lightly that we are suing our federal regulator. However, we have long said we are pursuing all options with regard to the CFPB’s harmful small-dollar lending rule, and one of these options was litigation,” said Dennis Shaul, chief executive of the CFSA.

A judge ruled against the CFSA on June 12, and upheld the official start date of the new regulations: Aug. 19, 2019.

Shortly after that ruling, the CFPB petitioned the court asking that the lawsuit, as well as the payday rules, be put on hold until the Bureau can modify them in early 2019. The CFPB also reiterated the request for a formal stay on the implementation of the rules as written.

As of this week, U.S. District Court Judge Lee Yeakel of the Western District of Texas ruled against that delay of implementation again, though he did agree to stay proceedings in the lawsuit.

Yeakel ruled that because the rule’s effective date was not immediately approaching, the agency still has time – and a standard method – to change their own rule before it goes into effect.

The finding matched up with the arguments made by The Center for Responsible Lending and Americans for Financial Reform, who supported the timely implementation of the rules as written in court.

“If the agency is unhappy with its own lawfully promulgated rule, [federal law] sets forth the procedures for issuing a new or revised regulation,” they said.

The CFPB, for its part, seems to be moving ahead with redrafting the rule, according to reports. According to the latest version of its regulatory agenda put out this spring, the CFPB estimated that it will issue new proposed rules in Feb. 2019.