Payday lenders scored a major victory on Wednesday after the Consumer Financial Protection Bureau decided to scrap tougher restrictions that were due to take effect later this year.
The industry has spent years trying to push back against the new rules, which were crafted under the Obama administration. The regulations aimed to prevent spiraling debt by limiting the number of consecutive loans that could be made and requiring lenders to check that borrowers could repay their loans on time while covering basic living expenses.
In her first major policy move, new office director Kathleen Kraninger proposed eliminating nearly all of the substantive requirements of the settlement, including the “repayment capacity” mandate. There was “insufficient evidence and legal support” for the disposition, the office said. It also sought to remove a limit that would have prevented lenders from making more than three short-term loans without a 30-day cooling-off period.
A payday loan customer who borrows $500 typically owes about $575 two weeks later, or an annual percentage rate of almost 400%. If borrowers cannot repay their loans on time, they often borrow more and take on more debt. It’s a tough cycle to break: Half of all payday loans are part of a streak that spans at least 10 consecutive loans, according to Consumer Affairs data.
Consumer advocates said the bureau’s reversal put the interests of businesses ahead of those of the public.
Linda Jun, senior policy adviser for Americans for Financial Reform, wondered if the change was simply the result of the industry making enough noise.
“It’s not like the agency wrote the old rule on a whim,” she said. “It was the result of a five-year process, with a lot of research and conversations with stakeholders on all sides. To basically say ‘just kidding’ and toss it aside is hugely disconcerting.”
Payday loans are indeed illegal in about 20 states, but in the rest they’re profitable and popular: Americans borrowed nearly $29 billion from payday lenders in 2017, paying $5 billion in fees , according to estimates by John Hecht, an analyst at financial services company Jefferies.
In order to prevent borrowers from becoming trapped in a cycle of debt, the office developed new national rules at the end of 2017. The rules were the result of years of research and legislative work – and were fiercely opposed at every step by lenders, who warned the new restrictions would decimate their business. Industry officials have said many of the country’s 14,300 payday lender storefronts — roughly the same number of U.S. locations as Starbucks — are expected to close.
The centerpiece of the regulation was its requirement that lenders underwrite most loans by checking borrowers’ incomes and debts to determine if they could afford to repay the loans while meeting other financial obligations. Providing loans that consumers lacked the income to repay was “unfair and abusive”, the consumer affairs office said at the time.
But under President Trump, the agency has changed course and been friendlier to the companies it regulates.
In June, Acting Consumer Affairs Director Mick Mulvaney, who is now Mr Trump’s acting chief of staff, sided with two trade groups and asked a judge to block the entry into force of the new rules this year. On Wednesday, the agency sought to delay the take-out clause’s effective date to the end of 2020 from August, giving it time to go through the necessary administrative steps to cancel it. Delaying the requirement would preserve at least $4 billion in sales that lenders would otherwise lose, the bureau said.
The bureau said it would leave some lesser parts of the rule in place. Most notably, lenders will no longer be allowed to try to withdraw funds from a borrower’s account after two failed collection attempts, a practice that often leaves insolvent customers inundated with overdraft fees.
Lenders welcomed the changes, but said they wished the bureau had gone further. The Community Financial Services Association of America, a trade group that sued last year in federal court to end all new restrictions, said it was pleased the bureau was correcting some of the “flaws criticisms” of the rule, but that problems remained. .
Limits on payday loans “will push consumers into dangerous and harmful alternatives,” said Dennis Shaul, the group’s chief executive. The trade group will pursue litigation to overturn the rules, he said.
The agency has punished several payday lenders since Ms Kraninger took office in December, although it released them with relatively light financial penalties.
Last month, the bureau punished Enova, which runs online lender CashNetUSA, for failing to honor promised loan extensions and for debiting customers’ bank accounts without authorization. Enova, which earned $29 million last year on sales of $843 million, agreed to change its practices and pay a $3.2 million fine.
The office’s new proposal will be open for public comment for 90 days. After that, the agency can move forward to make the changes final.