The federal judge who stayed the compliance date Consumer Financial Protection Bureau’s (CFPB) small-dollar lending rule will review joint status updates about the rule and litigation challenging its provisions due by Dec. 6, according to official court records.
In November 2018, Texas District Court Judge Lee Yeakel reversed a previous court ruling and ordered that the rule’s Aug. 19, 2019, compliance date to be stayed pending a review of the rule’s provision requiring payday lenders to determine a borrower’s ability to repay (ATR) a loan. The ruling came in response to a lawsuit filed by two payday lending industry groups – Community Financial Services Association of America (CFSA) and the Consumer Service Alliance of Texas (CSAT).
In February, the CFPB proposed to rescind ATR and mandatory underwriting provisions of its small-dollar lending rule. In a separate action, the bureau proposed to delay the implementation of mandatory underwriting requirements by 15 months to solicit and review public feedback. In June, the bureau proposed to delay compliance with the rule’s provisions by an additional year to Nov. 19, 2020.
CFSA leaders have argued that the rule’s provisions in question are not based on sufficient evidence and would limit access to a credit source relied upon by many non-banked and under-banked consumers of low-to-moderate income levels. Consumer advocates assert that the payday lending industry victimize the consumers it purports to help by trapping them in a cycle of high-interest debt for several months and even years.
More than 100 Democratic lawmakers wrote to CFPB Director Kathy Kraninger in August, condemning the bureau for its decision to delay the rule’s effectiveness.
“Contrary to recklessly false characterizations, payday, car-title, and predatory consumer installment loans made without regard to the borrower’s ability to repay are not acceptable or sustainable sources of credit,” the lawmakers wrote. “Payday and car-title lenders have the leverage to seize hundreds if not thousands more than the original cost of the loan and have control over the borrower’s bank account and/or the ability to repossess the borrower’s car. The result is obvious: payday and car-title lenders lack the incentive to make loans that borrowers have the ability to repay while still being able to afford basic necessities of life.”
Dennis Shaul, CEO of the Community Financial Services Association of America (CFSA) defended the industry against the lawmakers’ contentions in a letter in which he took issue with the title of a recent hearing in the House Financial Services Committee, referring to small-dollar loans as “debt traps.”
“We would challenge the subcommittee to consider what type of credit is not a debt trap,” Shaul wrote. “The Schumer Box on a consumer credit card statement with a $9,000.00 balance discloses a payoff period of 25 years if only the minimum monthly payment is made. I would submit to you that is indeed a debt trap. There is a larger problem with consumer credit in this country, and it doesn’t start with small-dollar loans. This industry is an easy target because of common misperceptions, blatant mischaracterizations by our critics and patronizing dialogue from those who believe they are better equipped to make decisions about how and when certain consumers access credit.”
Additionally, Shaul contended that small-dollar loans are an easy target for critics because “they are not the loans that policymakers in Washington are availing themselves of, but rather are seen as a detached, unconventional and objectionable form of credit that only a desperate, vulnerable and uneducated consumer would seek out.” He contended that, given the number of Americans shown to have difficulty covering a sudden expense of $400 or more, payday loans are a valuable option for a significant portion of the general population.