The Consumer Financial Protection Bureau (CFPB) is considering revision or repeal of an Obama-era regulation aimed at clamping down on some of the practices of lenders that provide small-dollar, high-interest, short-term loans.
The Payday Lending Rule finalized in January 2017 under former CFPB Director Richard Cordray was set to go into effect on August 19, 2019. The rule also targets single-payment car title loans, in which borrowers use their car or truck title for collateral, and loans requiring a single, large, balloon payment.
Further, under the rule’s Mandatory Underwriting Provisions, payday lenders would have to confirm their borrowers’ ability to repay short-term loans of up to 45 days without incurring late-payment penalties, such as higher interest rates, while meeting living expenses.
The CFPB has extended the deadline for complying with the 2017 rule until November 19, 2020, the bureau announced on June 6, giving the agency time to finalize the payday lending rule. The CFPB could issue a revision of the loan regulations at any time in the next few months.
Reducing Credit Access
Payday loans often have annual interest rates of 300 percent to 400 percent, and borrowers can fall into a “payday debt trap” in which they have to take out new short-term loans in order to pay off existing ones.
In its 2017 rulemaking, the CFPB found cutting back on payday loans would reduce access to credit in low-income neighborhoods, said Thomas Pahl, policy associate director for the research, markets, and regulations division of the CFPB, at a hearing before the House Oversight and Government Reform Committee’s Subcommittee on Economic and Consumer Policy on May 16.
“The Bureau found [in 2017] that these Mandatory Underwriting Provisions would result in a decrease of between 51 and 52 percent in the number of payday loans consumers take out and a reduction in revenue [to lenders] of between 67 to 68 percent,” Pahl testified.
“[In addition] there would be a decrease of between 89 and 93 percent in the number of short-term vehicle title loans consumers take out,” Pahl stated.
Restricting ‘Avenues of Credit’
The bureau decided to revisit the 2017 proposal, says Pahl, because of questions about the basis for the regulation.
“The Bureau has come to have serious doubts as to whether the appropriate legal standards were applied, and whether the evidence was sufficiently robust and reliable to support the Bureau’s determination that small dollar lenders engage in an unfair or abusive act or practice if they make loans without making a reasonable determination that consumers can repay them,” Pahl testified.
There was little evidence given for the rule when it was implemented, says Norbert Michel, director of data analysis at The Heritage Foundation’s Institute for Economic Freedom.
“The original rule had no real data supporting it,” Michel said. “In revising the rule, the CFPB is doing its job of protecting consumers by leaving open avenues of credit to those in need,” Michel said.
‘A Win for Consumers’
The costs the payday loan rule imposes on consumers and the loan industry far outweigh any benefits, says Daniel Press, a policy analyst at the Competitive Enterprise Institute.
“The original payday lending rule was one of the most detrimental regulations ever issued by the CFPB,” Press said.
The 2017 restrictions on payday loans would cause difficulties for low-income borrowers, says Press.
“Put forward under the guise of consumer protection, the rule would have stripped valuable financial services away from some of the most vulnerable people in society,” Press said. “The decision by the Trump administration to preserve consumer choice and access to credit is the right one.
“Rescinding the payday loan rule is a win for consumers, allowing individuals—and not Washington bureaucrats—to decide what is best for themselves.” Press said.
Bonner R. Cohen, Ph.D. ([email protected]) is a senior fellow at the National Center for Public Policy Research.
Thomas Pahl, Statement before the House Committee on Oversight and Reform, Subcommittee on Economic and Consumer Policy, Consumer Financial Protection Bureau, May 16, 2019: https://heartland.org/publications-resources/publications/testimony-the-cfpbs-proposed-repeal-of-the-payday-lending-rule