Following up on acting director Mick Mulvaney’s previously stated intention to reconsider the agency’s payday lending rule, the Consumer Financial Protection Bureau (CFPB) has said it expects to issue proposed rules in January that would alter the rule’s ability to repay (ATR) requirements but not affect its payment provisions.
The reason the bureau said it decided to revisit the ATR provisions for short-term and long-term loans with balloon payments and not those written to prevent lenders from unfair or abusive payment withdrawal is that the ATR provisions would have “much greater consequences for both consumers and industry.”
As it stands, the rule stipulates that when a lender issues a short-term or longer-term loan with balloon payments, that lender must reasonably determine the borrower’s ability to repay the loan. Many critics of the rule have argued that this portion of the rule undermines the primary purpose of payday loans – to offer credit options to people who do not qualify for traditional loans or need only a relatively small amount to cover an unexpected expense or other temporary financial deficit.
When finalizing the rule in 2017, then-Director Richard Cordray said, “The rule is guided by the basic principle of requiring lenders to determine upfront whether people can afford to repay their loans.”
The portion of the rule prohibiting lenders of such loans with annual percentage rates of more than 36 percent from continually attempting to withdraw funds for repayment from a borrower’s account after two failed attempts would remain applicable to any person or entity issuing them. There is an exception for “payment withdrawals by lenders who also hold the consumer’s deposit account,” provided they meet certain conditions.
Industry leaders in some sectors of the financial marketplace support the bureau’s plans to revisit what they believe to be a “flawed” rule, resulting from a partisan agenda.
“As the bureau revisits this highly flawed rule, CFSA (Community Financial Services Association) believes that delaying the rule’s compliance date is the proper course of action to avoid forcing companies to comply, or prepare to comply, with a rule that may never take effect,” CFSA CEO Dennis Shaul said in a statement to Dodd Frank Update. “Going forward, any new rule must achieve the delicate balance of preserving consumers’ access to credit while enhancing consumer protections. The bureau’s rule was crafted on a pre-determined, partisan agenda that ignored more than one million customers who spoke out against the rule, failed to demonstrate consumer harm from small-dollar loans, ignored unbiased research and data, and relied on flawed information to support its rulemaking.”
Consumer Bankers Association President and CEO Richard Hunt welcomed the news of the bureau’s plans but urged that the agency go further and reconsider the rule in its entirety.
“We appreciate the bureau reconsidering the flawed small-dollar lending rule released last year. Study after study has shown about half of American families cannot cover emergency expenses,” Hunt said in a statement. “Allowing banks to operate in this space – subject to sound banking practices – will prevent bank customers from being forced to rely on less regulated or unregulated sources of income like online lenders, check cashers or pawnshops. The bureau should consider all aspects of the rule, not just the ability-to-repay requirements, to prevent unintended consequences for loans the original rule was not intended to cover.
“Accordingly, instead of waiting to delay the implementation date of the current rule, we encourage the bureau to immediately delay the rule until the review is complete,” he added.
The consumer advocacy group Americans for Financial Reform (AFR) was critical of the bureau’s announcement for decidedly different reasons.
“The consumer bureau used to be a great agency dedicated to enforcing the law and protecting consumers, [but] is now to putting predatory lenders ahead of the law and its mission with this attempt to gut consumer protections,” AFR Payday Campaign Manager José Alcoff said in a statement. “Mulvaney’s CFPB now wants to wipe out a simple, common-sense requirement that lenders ought to examine a borrower’s creditworthiness before making a loan that too often becomes a debt trap for the most vulnerable consumers.
“We have already seen that Mick Mulvaney’s bureau has little to no interest in enforcing the law against predatory lenders,” he continued. “Under Mulvaney, the consumer bureau has dropped cases against predatory lenders that illegally charged up to 950 percent annual interest rates, dropped an investigation into a case against a lender that had contributed to Mulvaney’s congressional campaigns, and just this week settled a suit against payday lender Cash Express for a paltry sum, far less than the originally planned amount which would have gone to refunding the consumers that they had wronged.”
The bureau said it will make final decisions regarding the scope of its proposal closer to the issuance of the proposed rules.
The agency also stated that it will publish the proposal “as quickly as practicable consistent with the Administrative Procedure Act and other applicable law.”
Dodd Frank Update will gather more details and expert analysis on what the changes could mean for the industry in the coming weeks.