NEW YORK — The nation’s federal financial watchdog said Wednesday it plans to scrap most of its regulations governing payday lenders.
The move is seen as a victory for the payday loan industry, which has argued that government regulations could kill much of its business. But consumer groups say payday lenders exploit the poor and disadvantaged with loans with annual interest rates of up to 400%.
The cornerstone of the regulations was a requirement that lenders ensure borrowers could afford to repay payday loans without being stuck in a cycle of debt, a standard known as “repayment capacity.” . This standard, which was due to come into effect in August, would be scrapped under the new rules. Another part of the rules, which would have limited the number of payday loans a person could carry over, was also eliminated.
Critics of the payday loan industry have argued that without these underwriting standards, new Consumer Financial Protection Bureau regulations are effectively ineffective. The main criticism of the payday loan industry was that many borrowers took months to repay a loan originally designed to last only a few weeks, renewing the loan again and again.
“This proposal is not a modification of the existing rule … it is a complete dismantling of consumer protections [the bureau] finalized in 2017,” said Alex Horowitz, a researcher at Pew Charitable Trusts, a think tank whose industry research was widely used by the bureau when the original rules were unveiled a year and a half ago.
Payday loans are allowed in California and 32 other states, with the rest prohibiting them. An estimated 12 million Americans take out payday loans each year from websites and about 16,000 stores.
The overhaul of the payday loan rule is “disturbing, but not surprising,” said Linda Jun, senior policy adviser at Americans for Financial Reform, a consumer advocacy group. “The industry thrives on being able to do whatever it wants. That’s their business model, having zero standards.”
The announcement was the first scrapping of regulations under new Consumer Financial Protection Bureau director Kathy Kraninger, who took over the office late last year. Mick Mulvaney, who was appointed by President Donald Trump as the bureau’s acting director in late 2017, announced a year ago that the bureau intended to review the rules. As a congressman from South Carolina, Mulvaney received tens of thousands of dollars in political donations from the payday loan industry, raising concerns that he was too tied to the industry to regulate it from appropriate way.
The Community Financial Services Association of America, a payday loan group, holds its annual conference in March at Trump’s Doral Golf Club in Miami. He also held his conference there last year. Government watchdog groups have criticized the use of Trump hotels and resorts by corporations and lobby groups as a way to influence regulation and policy by giving money to the president.
A spokesperson for the Community Financial Services Association of America did not immediately respond to a request for comment.
Under the Barack Obama administration, the Consumer Protection Bureau spent nearly five years working on a process to nationalize regulation of the payday loan industry, which is regulated primarily at the state level. Arkansas law caps the annual interest rate on loans at 17% for all lenders except out-of-state based banks.
The office began the regulatory streamlining process in 2012 and its finalized rules were finalized at the end of 2017. It was one of the last major pieces of regulation completed under Richard Cordray, the first permanent director of the office, before he leaves the office.
“I think this is a bad development for consumers,” Cordray said Wednesday. “We looked carefully at this industry and there was a common problem of borrowers trapped in long-term debt. We had put together what I considered to be a modest proposal. The change is really disappointing and rushed.”
Wednesday’s announcement is one of the most significant steps the Trump administration has taken yet to redo the office. Republicans and business leaders have complained for years that the bureau was too aggressive and often pushed legal boundaries to go after financial companies.
Under the Trump administration, the office has relaxed its approach. He dropped several lawsuits against payday lenders and removed enforcement powers from his Fair Lending office. Rather than pursue exorbitant penalties, the bureau must balance the needs of consumers and the financial firms it regulates, agency officials say.
The bureau proposed keeping part of the payday loan regulations: a ban on the industry making multiple debits from a borrower’s bank account, which consumer advocates say has caused hardship to borrowers due to overdraft fees. In a statement, the Community Financial Services Association of America said it felt the repeal of the bureau did not go far enough and also wished the debit regulations had been removed.
The proposed new rules are subject to a 90-day public comment period. The proposed changes are likely to face legal challenges as the bureau deviates dramatically from its previous position, something federal regulators are generally not allowed to do under the law.
Information for this article was provided by Ken Sweet and Bernard Condon of The Associated Press; Renae Merle of the Washington Post; and Jim Puzzanghera of the Los Angeles Times.
A section on 02/07/2019