CFPB Payday Loan Changes Scrap Ability To Repay Requirement

Earlier this week, the Consumer Financial Protection Bureau (CFPB) issued its final rule on payday lending — revoking some would-be restrictions that date back roughly three years.

Among those restrictions: That lenders must make sure that borrowers could satisfy the terms of those loans, known as “ability to repay.”

That rule had been in place since 2017, reported CNBC, and before President Donald Trump appointed new leadership at the bureau. The ability to repay mandate required lenders to verify borrowers’ income and expenses.

Now, the final rule issued Tuesday (July 7) does not require that lenders establish that ability to repay.

In a statement Tuesday, the CFPB said that “rescinding the mandatory underwriting provisions of the 2017 rule ensures that consumers have access to credit and competition in states that have decided to allow their residents to use such products, subject to state-law limitations.” The CFPB also said there were “insufficient legal and evidentiary bases” to mandate the underwriting provisions.

Still in place are rules that prevent payday lenders from trying on multiple occasions to withdraw funds from bank accounts, which CNBC said are typically conditions of payday loans.

Who Takes the Loans

As for payday loans — and the financial straits in which many Americans may find themselves — consider the fact that PYMNTS found 6 in 10 Americans are living paycheck to paycheck. Drill down a bit, and roughly percent have issues covering basic bills, and about 24 percent don’t make enough to cover even those basic expenses. Separately, in 2018, well before the pandemic, PYMNTS’ Financial Invisibles report found that 12 percent of consumers sampled used payday loans and did not have credit cards.

Separately, the Wall Street Journal reported this week that small dollar lending volume has fallen by 40 percent since 2007 as a number of states capped interest rates. In 2018, reported the WSJ, in the U.S., borrowers took out $90 billion in short term loans.

As might be expected, the Tuesday announcement has sparked debate, condemnation and support.

NPR reported that, as stated by D. Lynn DeVault, chairman of the Community Financial Services Association of America (a trade group that represents payday lenders), “the CFPB’s action will ensure that essential credit continues to flow to communities and consumers across the country, which is especially important in these unprecedented times.”

Separately, Alex Horowitz, senior research officer with Pew Charitable Trusts’ consumer finance project contended that “by eliminating the ability-to-repay protections, the CFPB is making a grave error that leaves the 12 million Americans who use payday loans every year exposed to unaffordable payments at annual interest rates that average nearly 400 percent.”

As noted in this space, last month the U.S. Supreme Court ruled the structure of the CFPB — as crafted during the Obama administration in 2014 — is unconstitutional. The court ruled the president has the power to remove a CFPB director during the agency chief’s six-year term. Effectively, the court ruled the CFPB head can be fired for any reason.

In its ruling, the Supreme Court stated that “we therefore hold that the structure of the CFPB violates the separation of powers. We go on to hold that the CFPB Director’s removal protection is severable from the other statutory provisions bearing on the CFPB’s authority. The agency may therefore continue to operate, but its Director, in light of our decision, must be removable by the President at will.”