Morgan Lewis Principal Weighs In On Payday Loan Debate

The Consumer Financial Protection Bureau (CFPB) said earlier in the month that it will look to overhaul a number of payday loan regulations that were put in place in 2017 and were slated to go into effect in August of this year.

Among the regulations slated for overhaul is the one known as “ability to repay,” which would require short-term lenders to ensure that a borrower could repay the short-term, small-dollar loans before extending them to consumers. That would entail verification of a borrower’s income, debt and spending habits. Alternatively, the lender could choose to sidestep that verification process and change the loan to an installment offering, with a set time frame and payment schedule agreed to at the time of issuing the loan.

As has been reported, the Bureau, recently re-helmed under Kathy Kraninger, has said that the “ability to repay” provision should be removed from the raft of provisions slated to take effect this year. The agency has said that keeping the requirement would negatively impact consumer access to credit and hurt competition in the markets – and, added the CFPB, there is “insufficient evidence and legal support” for the provision.

Other provisions slated to become reality (now in 2020) are still in place, including one that disallows lenders from repeatedly attempting to withdraw payments from accounts after being denied a single time.

A commentary period remains in effect, and through the next several weeks, all sorts of viewpoints are likely to be aired.

In an interview with PYMNTS conducted over written exchange, Nicholas Gess, principal of Morgan Lewis Consulting, said the CFPB’s move to rescind the “ability to repay” provision is “hardly surprising,” as the Trump administration had made regulatory rollback a campaign issue in 2016. He added that “at a more granular level, the CFPB has shifted from looking only at the direct impact on consumers of the lending practice in question to a broader balancing effort in which consumer access to credit is considered as well.”

Gess, who serves as strategic litigation, risk avoidance and communications principal of Morgan Lewis Consulting told PYMNTS that the rule, as written, would likely have increased the costs of originating new loans and possibly “make them not economically viable,” while new proposals may look at lending through a “broader lens” that can in turn judge whether the loan products themselves are desirable.

In reference to the payday loan landscape in general, Gess said the CFPB has lacked the authority to ban the payday loan product, and “it had stopped just short and simply made the product not viable. So long as there is consumer demand for the product, there will be competition for it, and the lenders who come out on top may well be those with the capital and foresight to take advantage of new technologies. It’s not really different than any other financial services product: Innovation will be a competitive edge.”

But, as PYMNTS noted, the process from commentary to final rulemaking is hardly done in a straight line, and Gess noted there will likely be Congressional oversight hearings, particularly in the House, as well as legal challenges.

“This may be an election issue, given that the proposal pushes the date off to Nov. 20, 2020, just days after the next election for president, the entire House of Representatives and one-third of the Senate.” He added that as the debate becomes political, “it will be hard to separate out the proposals, which are broadly acceptable, as the underlying issue is a debate about whether payday lending ought to exist at all … politics will likely drown out the substance. I do not foresee significant stakeholders coming to agreement on this matter.”

Sloan to Go It Alone

Separately, news came this week that the CEO of financial giant Wells Fargo, Timothy Sloan, may appear, alone, next month before the House Financial Services Committee.

The Wall Street Journal reported that the aim would be for the panel to “scrutinize” the bank’s recent abuse scandals. The appearance would take place on March 12, preceding an April hearing where Sloan would be joined by the CEOs of JPMorgan Chase, Goldman Sachs, Morgan Stanley, Citigroup and Bank of America.