Office of Consumer Affairs rolls back payday loan rule : NPR

Kathy Kraninger, director of the Consumer Financial Protection Bureau, speaks to the media in Washington, DC, in December 2018.

Carolyn Kaster/AP

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Carolyn Kaster/AP

Kathy Kraninger, director of the Consumer Financial Protection Bureau, speaks to the media in Washington, DC, in December 2018.

Carolyn Kaster/AP

The Consumer Financial Protection Bureau is taking aim at one of the hallmarks of the Obama administration: a rule that would protect the most vulnerable borrowers from the bloated debt that can accumulate with payday loans.

The rule never really took effect. And now the Consumer Protection Bureau is proposing to take it off the table.

Agency chief Kathy Kraninger said in a statement that removing the rule would encourage competition in the payday loan industry and help improve credit options for borrowers in need.

Critics say the Consumer Protection Bureau is siding with the very industry it is supposed to regulate and removing a rule that would have protected borrowers from skyrocketing interest rates.

The way payday loans work is that payday lenders usually offer small loans to borrowers who promise to repay the loans by their next paycheck. Interest on loans can have an annual percentage rate of 390% or more, according to a 2013 CFPB report. Another report from the bureau the following year found that most payday loans – up to 80% – are rolled over into another loan within two weeks. Borrowers often take out eight or more loans a year.

A rule cracking down on payday lending was first proposed in 2016. President Obama touted the rule as the end of predatory lending. He warned payday lenders in a speech: “If you’re making this profit by trapping American workers in a vicious circle of debt, you’ve got to find a new business model.

The rule would have required lenders to determine whether customers could repay their loans. It would also limit payday lenders to just two attempts to withdraw money from borrowers’ accounts, a measure designed to target fees charged by payday lenders.

Under the Trump administration, the Consumer Protection Bureau has backtracked. The rule was supposed to go into effect in January 2018 – but it never did. Instead, then-CFPB director Mick Mulvaney delayed the rule.

On Wednesday, bureau officials said they plan to remove the part of the rule that requires payday lenders to verify borrowers’ ability to pay. And they plan to postpone the rest of the rule until 2020.

A senior CFPB official said the bureau’s decision stemmed from a concern that there was not enough evidence to show payday loans were sufficiently unfair and abusive to warrant the rule. Additionally, the official, who spoke to reporters on condition of anonymity, said if the rule had gone into effect, about two-thirds of borrowers would not qualify for a payday loan.

Consumer advocates say move hurts borrowers.

“People in power have chosen to side with payday lenders rather than consumers,” said Kyle Herrig, senior adviser to consumer advocacy group Allied Progress.

Herrig said the payday rule being discussed was drafted after five years of research that included reviewing millions of loan files.

“This research concluded that the repayment capacity standard was key to preventing consumers from falling into the debt trap,” Herrig said.

Advocacy groups have said removing protections would put minority communities at particular risk.

“With little accountability for their actions, payday lenders have long preyed on communities of color and drained them of their hard-earned savings,” NAACP Washington office director Hilary Shelton said in a statement. “We strongly urge Kathy Kraninger to reconsider her decision to weaken the payday loan rule and allow it to move forward as planned without delay.”

Marisabel Torres, senior political analyst at UnidosUS, said her advocacy group and “thousands of Latinos” have joined a nationwide campaign calling for a tough payday loan rule.

The CFPB was created to protect consumers against losses like those suffered during the Great Recession. Its first director, Richard Cordray, took aggressive steps to regulate banks and other financial institutions.

Republicans accused Cordray of wielding too much power. President Trump’s first choice to head the agency, Mulvaney, had called it a “sick and sad joke” and, as a congressman, proposed a bill to abolish it. Mulvaney had accepted campaign donations from payday lenders, and NPR reported that under his leadership the agency had relaxed its oversight of the industry.

Payday lenders including Select Management Resources, Advance America and Check Into Cash Inc. also made substantial donations to Trump’s inaugural committee. The industry trade group, the Community Financial Services Association of America, held its annual conference at Trump National Doral Golf Club near Miami in August 2018.

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