Rule Aimed to Protect Payday Loan Borrowers Could Be Reversed

Inside Subprime: Aug 17, 2018

By Ben Moore

Under the temporary leadership of Mick Mulvaney, the Consumer Financial Protection Bureau (CFPB) is pushing to reverse an Obama era rule designed to protect consumers against predatory lenders. Mulvaney, who is the director of the Office of Management and Budget, has been against the rule before he was ever appointed by Trump as head of the CFPB – as a congressman he even tried to end the agency altogether.

Ever since Mulvaney’s appointment as head of the CFPB, he has worked to significantly ease restrictions on payday, auto-title, and other “high-rate” installment lenders that were created by the bureau. Under the Obama administration, the CFPB introduced a rule requiring these lenders to first verify a borrower’s income and then confirm their ability to repay the loan before proceeding. While the rule went into effect in January of this year, the provisions are not mandatory until August of 2019. Mulvaney pushed the bureau to request a delay of the compliance date past next August, but a federal judge ruled against the request.

Earlier this year, 43 U.S. senators signed a letter objecting to Mulvaney’s push to rescind the payday lending rule. The letter recognized that while the loans do provide immediate financial relief for consumers in need, the relief comes at the cost of sky high interest rates (some exceeding 300 percent) and unexpected finance charges. These fees could lead borrowers into loan default, or open up the possibility for the borrower to enter a cycle of debt of continued payday loan borrowing and never-ending interest fees. Back in 2016, before the rule was put into place and was still under consideration, it was estimated that 15 million U.S. citizens were turning to payday loans, which in turn was producing more than $7 billion in fees and interest from APRs averaged at 391 percent. The majority of the borrowers were low-income Americans, with extremely limited financial options. 80 percent of the loans were renewed within 2 weeks, with 27 percent of borrowers defaulting on their first loan. 1 in 5 title-loan borrowers has had their vehicles seized by a lender for loan defaults.

There are some states that allow payday loans also provide better protection for borrowers. For example, the state of Washington limits payday loans to a $700 maximum, with no more than 8 payday loans allowed to be taken out in a year. The state also limits fees to 15 percent on loans under $500, with loans exceeding $500 limited to a 10 percent fee. Unfortunately, there are still many states with zero consumer protection in place, with the only hope for borrowers being the rule implemented by the CFPB earlier this year.

Public opinion of the CFPB’s role in protecting consumers is positive. In 2015, The Pew Charitable Trusts reported that 75 percent of survey respondents believed that payday loans needed stronger regulations, and a poll in 2017 (by the Center for Responsible Lending and Americans for Financial Reform) discovered that 74 percent of respondents supported the CFPB, with almost equal agreement among both Democrats and Republicans. The bureau is expected to replace Mulvaney – they are currently waiting for the confirmation of Kathy Kraniger as the new bureau head. However, there isn’t much hope that Kraniger will derail Mulvaney’s push to eliminate the rule. Kraniger testified before a Senate committee in July claiming she “intended to continue the bureau’s pro-business shift” and do away with the rule protecting borrowers.

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