Proposed payday loan rule rewrite sparks backlash

A proposed change to the small-dollar lending rule at the Consumer Financial Protection Bureau has generated pushback from consumer advocates and support from the payday lending industry.

A proposed change to the small-dollar lending rule at the Consumer Financial Protection Bureau has generated pushback from consumer advocates and support from the payday lending industry.

Initially finalized under the bureau’s former director Richard Cordray in 2017, the rule—which governs payday lending, auto title loans and certain installment loans—required lenders to make certain underwriting determinations prior to finalizing the loan.

Under recently confirmed Director Kathy Kraninger’s proposal, however, lenders would no longer be required to confirm borrowers have the ability to repay the loans prior to making them.

The bureau cited “insufficient evidence and legal support for the mandatory underwriting provisions” in the rule’s 2017 formulation. The underwriting requirement would “reduce access to credit and competition” the bureau said.

About 12 million Americans each year use payday loans, which can have an annual percentage rate of 390 percent or more, according to a 2013 CFPB report.

Kraninger also proposed pushing the rule’s implementation date back to Nov. 19, 2020, from Aug. 19, 2019. It does not propose changing other aspects of the rule, the first proposed federal regulation of payday loans.

The move sparked swift condemnation from some consumer advocates and some Democrats.

“I am deeply troubled by the Consumer Bureau’s proposal to gut a much-needed rule that would have reined in payday lenders and ensure consumers can afford to pay off their loans,” said Rep. Maxine Waters (D.-Calif.), newly named chair of the House Financial Services Committee. “This proposal essentially sends a message to predatory payday lenders that they may continue to harm vulnerable communities without penalty.”

Those in the payday lending industry welcomed Kraninger’s proposed change, although some thought it didn’t go far enough.

“These rulemakings are good first steps,” said Dennis Shaul, CEO of the Community Financial Services Association of America. “However, we are disappointed that the CFPB has, thus far, elected to maintain certain provisions of its prior final rule, which also suffer from the lack of supporting evidence and were part of the same arbitrary and capricious decision-making of the previous director.”

Beau Brunson, a senior policy advisory at Consumers’ Research, argued in American Banker that the revision is “a victory for evidence-based governance and credit-starved consumers.”

Kraninger herself promised a balanced approach to the proposal, comments on which are due by May 15; comments on the proposed implementation delay are due by March 18.

“The bureau will evaluate the comments, weigh the evidence, and then make its decision,” Kraninger said. “In the meantime, I look forward to working with fellow state and federal regulators to enforce the law against bad actors and encourage robust market competition to improve access, quality, and cost of credit for consumers.”