A federal banking agency announced Wednesday that it plans to roll back Obama-era restrictions on payday and car title loans, a lending practice that many experts consider predatory.
The Consumer Financial Protection Bureau proposed repealing the rule that required lenders providing “Payday, Vehicle Title, and Certain High-Cost Installment Loans” to make an effort to find out if borrowers could repay the loan.
The Trump administration’s effort to repeal the rule came after President Barack Obama’s appointed director Richard Cordray left the agency and was replaced by Mick Mulvaney, who now serves as the acting White House Chief of Staff. .
The CFPB argued in a statement that the agency believed that repealing the rule and not requiring lenders to underwrite their loans would increase consumers’ access to credit.
“The Office is concerned that these provisions reduce access to credit and competition in states that have determined that it is in their best interest to use such products, subject to the limitations of state law,” the agency said in its statement. . .
Critics worry that payday lenders take advantage of impoverished Americans who often turn to them for small dollar loans in a pinch. These high-interest loans can force financially vulnerable people into a trap of exorbitant loans, renewals, and fees that lead to more debt.
The 2017 rule that would have limited the practice is a holdover from the past administration and was finalized under Cordray, who resigned in 2018 to run for governor in Ohio.
Cordray said Wednesday that the Trump administration’s action favors “payday lenders’ profits” over “some of the worst-hit consumers.”
“The move to undo the rule is based on a claim to protect ‘access to credit,’ but credit that is offered without regard for the borrower’s ability to pay is irresponsible and often predatory,” he said in a release. “Extensive data analysis shows this to be true for payday lenders. The Trump administration’s political efforts to reverse the rule will hurt those who are being abused and mistreated by bad loans. Hence, the action Today must be and will be subject to a severe legal challenge. “
The key part of the 2017 rule had yet to go into effect, and now it doesn’t seem like it will.
However, the public has 90 days to comment on the proposed changes to the rule, which will not be removed entirely.
Kathy Kraninger, who has served as CFPB director for two months, said her agency would read the comments before making a final decision.
“In the meantime, I look forward to working with other state and federal regulators to enforce the law against bad actors and encourage strong competition in the marketplace to improve the access, quality and cost of credit for consumers,” said Kraninger.
One aspect of the rule that will continue to apply is a provision that does not allow payday lenders and other lenders to continue withdrawing funds from a borrower account after it has failed two consecutive attempts. Lenders must also notify consumers in writing before they begin withdrawing money from their bank accounts, as well as if they make withdrawals on different dates or from different amounts or payment channels.
CFPB said it was delaying meeting that date from August 2019 to November 2020.
“These provisions are intended to increase consumer protection against harm associated with the payment practices of lenders,” the agency said in a statement.
Alex Horowitz, the senior research officer for the Pew Charitable Trusts consumer finance project, warned that the rule change would leave the 12 million Americans who use payday loans annually unprotected from predatory interest rates, which average the 400 percent.
“This proposal is not an adjustment to the existing rule; instead, it is a complete dismantling of the consumer protections finalized in 2017,” Horowitz said in a statement. “The rule was working. Lenders were making changes even before it formally went into effect, safer credit was beginning to flow, and harmful practices were beginning to fade.”
Credit groups, however, welcomed the decision. Some even lobbied for CFPB to repeal the rule in its entirety.
The Community Financial Services Association of America, a group that sued the CFBP over its rule against payday loans, said it was pleased with the announcement, but added that it did not think the current director’s decision would go far enough. .
Critics of the new policy said this met their fears that the Trump administration was working to undo consumer protections and would put financially vulnerable Americans at risk.
“Kathy Kraninger is on the side of loan sharks rather than the American people,” said Rebecca Borné, senior policy advisor at the Center for Responsible Lending. “The CFPB, under the direction of a former director, spent five years developing these consumer safeguards, receiving input from lenders, religious leaders, military and veterans organizations, civil rights groups, consumer advocates and consumers across the country. ”.