Could it be that the CFPB, under new Executive Director Kathy Kraninger, will be moving directly to eliminate the more controversial provisions of its payday lending rule? According to sources cited by American Banker, the CFPB will remove the controversial underwriting rules that would have forced lenders to establish a borrower's ability to repay before offering them a small-dollar, short-term lending product.
As things currently stand, lenders would have to verify a borrower’s income, debts and spending habits to assess their borrowing thresholds. Lenders can avoid this stipulation if they change their loan types from payday loans that need to be repaid in full on the borrower’s next payday to installment loans, which are paid over a set amount of time that is agreed to at the outset of the loan.
Proponents of the rule as it is written note that this provision can help keep consumers out of debt traps by preventing them from rolling over their unpayable payday loan every 30 days, which accrues new rounds of fees and costs. Opponents counter that the regulations will simply push a majority of short-term lenders out of business, as they will be unable to either meet the increased underwriting costs or to change their business model entirely to accommodate a different type of underwriting.
Last October, the CFPB announced it would “revisit” the rules. Sources now report that the CFPB has decided to eliminate the provision entirely.
If these reports are true, the change will almost certainly bring lots of controversy in its wake. Consumer advocates have long argued that the ability to repay provisions was critical in keeping customers from getting locked into cycles of debt with short-term, low-dollar lenders.
But since the departure of former Executive Director Richard Cordray in late 2017 – and under the leadership of Acting CFPB Director Mick Mulvaney – the agency began to evolve a different position on both the lenders and the rules created to rein them in. In April, Mulvaney sided with two payday lending groups that sued the CFPB in an attempt to invalidate the regulatory restrictions created by the new rules.
The CFPB argued in court that payday lenders would suffer "irreparable harm" from the 2017 final payday rule, and that it was "in the public interest" to reopen the rulemaking.
"Lenders throughout the market will face substantial decreases in revenue once the rule’s compliance date takes effect, which will lead many to exit the market," the agency said in a motion.
Others, however, are not so sure of the new CFPB logic, noting that in the absence of new research on payday lending done over the last year, it is not clear exactly how the CFPB could justify its decision to roll back regulation without ever letting it see the light of day.
“Gutting the ability-to-repay requirement completely is going to be difficult for the Bureau to defend,” said Casey Jennings, an attorney at Seward & Kissel and a former attorney in the CFPB’s Office of Regulations, who worked on the 2017 rule.
The expectation is that within the next few days or weeks (depending on when the government reopens, among other factors), the CFPB will issue a proposal to reopen the rule for public comment, thus kicking off the process for overhauling the 1,690-page rule from 2016.
The latest proposal also is expected to rescind the limits the rule placed on repeat reborrowing by a single consumer, as well as the underwriting requirements – but it will leave intact payment provisions that would limit the number of times a lender can try to extract loan payments directly from consumers’ bank accounts, sources said.
It is not news that is delighting consumer groups.
“Our expectation is that the CFPB will weaken the payday rule to the point that it has no practical value,” said Alex Horowitz, a senior research officer on the small-dollar lending project at the Pew Charitable Trusts.
It is, however, news that comes as a great relief to industry groups.
“The rule as previously proposed was really just an attempt to penalize the industry,” said Jamie Fulmer, a senior vice president at Advance America in Spartanburg, South Carolina. “There was a tremendous amount of academic research on both sides that was put forth, but the Bureau only dwelled on research studies that supported their positions, and dismissed the counterarguments."
If the rule change goes through as expected, the matter will likely once again go back to the courts, with consumer advocates suing the CFPB. Various consumer attorneys have opined that those consumer groups may have solid odds in court, as under the Administrative Procedure Act, they will have to prove that this regulatory change is not “arbitrary and capricious.”
“The underlying research didn’t change; the only thing that changed was the director of the agency," Jennings said. "I think it’s quite possible that a court finds that arbitrary and capricious.”