The next chapter in the ongoing saga that is payday loan regulation officially began yesterday (Feb. 6), with the announcement that the Consumer Financial Protection Bureau (CFPB) will overhaul a series of 2017 payday loan regulations, set to go into effect in August 2019. The regulations were crafted and drafted during the tenure of former CFPB Director Richard Cordray, an Obama-era appointee to the position, who abruptly departed the office a few weeks after the final draft regulations went public.
While there were many provisions to the payday lending rules as originally passed, the one that caused the greatest controversy was the “ability to repay” provision that would have required short-term lenders to establish a borrower’s ability to repay before offering them a small-dollar, short-term lending product. To fulfill that requirement, lenders would have had to verify a borrower’s income, debt and spending habits to assess their borrowing threshold before underwriting their loan — or avoid this stipulation by changing their loan type to an installment loan, paid over a set amount of time agreed upon at the outset of the loan.
The CFPB, now under the leadership of Kathy Kraninger, announced yesterday its recommendation to remove that requirement from the regulations over concerns that it would lower both consumer access to credit and stunt competition in the markets. The agency further noted that there is “insufficient evidence and legal support” for the verification requirements, adding that “rescinding this requirement would increase consumer access to credit.”
Some parts of the rules, however, did remain intact. Lenders will still be banned from attempting to directly withdraw payments from a user’s account repeatedly after being rebuffed once.
These restrictions won’t take effect until at least November 2020, as the new proposal will now go through a wholly new administrative process. There is also a 90-day period during which public comments on the proposed rule revisions are invited.
The Path To Revision
The changes, which generated much public reaction, were not a huge surprise.
Before Kathy Kraninger, there was Interim Director Mick Mulvaney, who, during his tenure, made his dissatisfaction with the regulations as written (now overturned) well known. When Kraninger was sworn in as the permanent head of the CFPB in December 2018, it was widely expected for the agency to soon announce a change in the proposed rules, and likely overhaul some of its more controversial points.
In the public statement announcing the decision, the CFPB noted that the measures as written could “reduce access to credit and competition in states that have determined that it is in their residents’ interests to be able to use such products,” and thus need both further review and revisions. Kraninger further noted that she looked forward to the process being more collaborative.
“The Bureau will evaluate the comments, weigh the evidence and then make its decision,” Kraninger said of the effort to overhaul the rules. “In the meantime, I look forward to working with fellow state and federal regulators to enforce the law against bad actors, and encourage robust market competition to improve access, quality and cost of credit for consumers.”
The Tumultuous Response
The news generated a lot of reaction. Proponents of the rules, as they were written, were quick to make their disdain for the rule reversal known.
“The Kraninger CFPB is giving an early Valentine’s present to payday lenders, helping them continue trapping Americans in crippling cycles of debt,” said Rebecca Borné, senior policy counsel at the Center for Responsible Lending, in a sentiment repeated throughout the afternoon as the news went out.
There was plenty of hyperbole to go around, but if one had to boil it down to a simple sentence, the opposition position as espoused by consumer advocate groups can be summed up by what Pew’s Alex Horowitz wrote: “The Bureau should withdraw this harmful proposal.”
Horowitz also said that the changes as proposed not only constituted tweaking the rules as first set forth by the agency, but is a “complete dismantling the consumer protections finalized in 2017.” The rules had been working, he noted, and lenders were making changes and introducing more fair products to the marketplace — but he now fears that the progress made will be stalled, or worse.
“Eliminating these protections would be a grave error, and would leave the 12 million Americans who use payday loans every year exposed to unaffordable payments at interest rates that average nearly 400 percent,” he wrote.
However, not everyone was quite so incredulous.
Advocates of the change have argued that the original rules were designed to force over 80 percent of short-term lenders out of business — unable to afford either changing the entire business model or running financial background checks for small-dollar loans. The rules aren’t an attempt at regulation, they argued, but at back-door prohibition.
Some voices, like Online Lenders Alliance (OLA), praised the CFPB for the change of heart on payday lending — and for making sure that those most in need of credit have easy access to it.
“Our goal in this rule, or any regulatory action, is to ensure [that] people who need short-term, small-dollar loans can get them from safe, regulated, reliable lenders online. There is a need for credit among the vast majority of Americans who can’t afford a financial shock like a job interruption, medical emergency, or car or home repair,” said Mary Jackson, CEO of OLA.
Others have said that easing regulations will spur more competition among a wider variety of firms to build products that best serve consumers — not a return to “bad practices.”
“Allowing banks to operate in this space — subject to sound banking practices — will prevent bank customers from being forced to rely on less regulated and more costly sources of funds like online lenders, check cashers or pawnshops,” said Consumer Bankers Association President and CEO Richard Hunt.
Advance America’s SVP of Public Affairs Jamie Fulmer told PYMNTS in a written statement that it is his hope that the “second bite at the regulatory apple will come up with a regulatory environment that both protects consumers and leaves the industry intact,” noting that the first rule-making process was “derived from a flawed process that ended up excluding shareholder views,” and had lopsided regulations.
“It is our hope that this new rule-making process will be more transparent and inclusive in its engagement of all stakeholders (borrowers, lenders and activists alike), to come to a final rule designed to meet Americans’ undisputed credit needs, protect them from illegal actors and make meaningful steps toward a level regulatory playing field in consumer financial services,” he said.
Whether it will turn out that way, that is the hope. Regulation and the short-term lending industry don’t have a long and glorious track record of working calmly and smoothly together. Yet, as it is clear that the CFPB’s thinking on the subject is evolving, at the same time, the need for small-dollar loans for consumers remains present. The need for regulation isn’t what’s being debated — it’s the devil in the details that we will see debated over the coming months.
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