In 2017, the Consumer Financial Protection Bureau (CFPB) finalized a rule to tackle so-called “payday debt traps”.
This week a new rule was finalized to reverse protections, which were largely aimed at protecting people in precarious economic situations from the trap of a vicious and costly cycle of astronomical interest rates – a phenomenon that particularly affects black communities.
In the meantime, the CFPB has announcement that next week would be “Consumer Financial Protection Week”.
The 2017 rule required that payday lenders – which provide short-term loans to people who must cover their expenses up to their salary – to Check to see if people who borrow money are able to repay it while still being able to meet “basic living expenses and major financial obligations”.
The rule, adopted under then CFPB director Richard Cordray, fell on a partisan divide. Consumer groups saw it as a triumph (or at least a bare minimum) and a key protection against predatory financial practice.
The lucrative payday loan industry has seen it as a threat, and Kathy Kraninger, the person Trump has appointed to head the agency, is now overturning a key rule of origin provision.
In credit markets, lenders typically check whether a borrower can afford to repay a loan before the money is loaned. Although the payday loan business group, the Community Financial Services Association of America’s best practices include “A reasonable and good faith effort to determine a customer’s creditworthiness and ability to repay the loan,” the group fought a requirement codified in the rule of origin for lenders to assess repayment capacity. ACSA applauded the news that the CFPB was removing this requirement, noting that the CFPB “will ensure that essential credit continues to be paid to the communities”. Other groups like the Consumer Bankers Association have echoed these sentiments.
The final rule, however, will preserve the rule of origin limitations on how payday lenders can withdraw funds directly from a borrower’s account. Under the rule, a lender cannot attempt to withdraw money from an account more than twice and will require written notice before making a first attempt.
Alan Kaplinsky, a partner at Ballard Spahr law firm that works on consumer financial services issues, told Yahoo Finance that “the industry is largely happy with what they got.”
On the other hand, Ashley Harrington, director of federal advocacy and senior counsel for the Center for Responsible Lending, told Yahoo Finance that “predatory lenders are often behind the idea that they are providing access to credit.”
“Our belief is that access to credit with triple-digit interest rates is not access to credit – it is a debt trap,” she said. “They target communities of color and low income people and put them in this cycle of debt.”
In April, a career economist at CFPB alleged that CFPB politicians had manipulated research to justify changing the rule.
A huge setback for poverty reduction efforts – and one that disproportionately affects black communities
In 2014, a CFPB to study found that most payday loans were not as short term as many might hope. Four in five loans ended up being renewed within 14 days, and 22% of them were renewed six or more times. Three in five consumers ended up paying more fees (mainly interest) than the amount borrowed on several loans, with one in five loans costing more fees than the principle.
Although the industry proclaims that payday loans are a lifeline for people in need of credit, the Bureau’s previous version found that they were ultimately harmful without the rule. The to study did not look at demographics, but many experts and researchers have found that it affects black people and other communities of color the most.
African Americans, a Bench The study found that they were 105% more likely than other groups to use payday loans, with 12% of African Americans using them compared to the next group, “Hispanics,” which was 6%. . According to New America, a think tank, the exclusionary practices of regular banks often contribute to “banking deserts in which payday lenders, check tellers and other non-bank services thrive.”
Jacob W. Faber, associate professor of sociology and public service at New York University who studies inequalities and the roles played by financial institutions, told Yahoo Finance that the practices of “alternative” providers are at the heart of concerns of defenders of the fight against poverty.
“Most people in this space see payday loans as the most predatory of alternative financial services because people tend to get trapped in these payday loan cycles,” Faber said. “Subprime loans are another form of financial abuse.
The “reverse red line,” as some call it, overturns the traditional red line (not giving credit to black communities) by giving people high interest loans that they may not be able to repay easily. trapping in defaults, a foreclosure or multiple cycles of a payday loan.
The situation has also deteriorated with the coronavirus. A recent report by The Wall Street Journal showed that lenders have started targeting borrowers for loans with “triple-digit interest rates”, and are moving into areas hard hit by the coronavirus, despite Google advertising bans and Facebook. (The companies deleted them when the Journal asked for comment.)
“This is the worst possible time for regulators to allow predatory lending,” Harrington said. “We are living in such difficult economic, social and political times and opening the door to bad practices makes no sense. “
Harrington and the Center for Responsible Lending advocate a 36% cap on interest rates, which is currently the limit that can be charged to members of the army. In 2019, average payday loan the interest rate was 391%.
The work of the consumer watchdog on the rule, however, may be far from over. As has been the case with previous rule making, the Kraninger-led version of the payday rule could be challenged in the courts, as well as on Capitol Hill.
If it is possible for a consumer group to launch legal action against the CFPB, the biggest battle could be fought in the halls of Congress and in the White House. Democrats could stumble the final rule in two ways: overturn the rule through the Congressional Review Act or, if Joe Biden wins the election, simply overturn the rule through a new CFPB leader.
Under the Congressional Review Act, a regulatory rule can be overruled if the House and Senate vote to “disapprove” it. A Democratic-led house could challenge the ARC, but a Republican majority in the Senate and veto power in the White House would make the effort virtually impossible at this time.
This means that the clearest path to repeal the rule comes from Biden’s election in November.
Isaac Boltansky, director of political research at Compass Point, told Yahoo Finance that a Democratic victory would quickly lead to Kraninger’s impeachment. His replacement, Boltansky said, “will prioritize a review and reopening of the rule to restore the original build of repayment capacity that was at the heart of Cordray’s rule.”
Kaplinsky said the breakdown industry itself could also take on CFPB in court. Lenders unhappy with the rule’s payments provision – the cap on the number of times a lender can attempt to withdraw funds – may attempt to argue that the rule is a violation of the administrative procedure law governing the bureaucratic rule-making process.
“It’s like everything else, if someone gets what they want, they always want a little more,” Kaplinsky said.