By Rebecca Borné
October 5, 2018 at 5:00 am ET
Last October, the Consumer Financial Protection Bureau released its payday and car-title lending rule. The agency, under the leadership of Richard Cordray, spent five years developing these safeguards, which included input from lenders, faith leaders, veteran and military organizations, civil rights groups, consumer advocates, and constituents from across the country.
This was the first time that a federal agency rolled out substantive protections to help stop payday lenders from trapping families in unaffordable debt.
But over the past year, predatory payday lenders have spearheaded an effort, with help from CFPB acting Director Mick Mulvaney, to stop the rule from moving forward.
Earlier this year, payday lenders pushed the House of Representatives and the Senate to introduce Congressional Review Act resolutions to repeal the CFPB payday rule. Americans from around the country called and wrote their members of Congress urging them not to bring the CRAs to a vote. Constituents won this fight and lawmakers did not act on these resolutions before their deadline.
In April, the payday lending industry, led by the Community Financial Services Association of America and the Consumer Service Alliance of Texas, filed a lawsuit to invalidate the payday and car-title rule and prohibit the CFPB from implementing it. The Mulvaney-led CFPB join the industry in its effort to delay the rule indefinitely. The court rejected that particular effort, but the payday lenders have again petitioned the court to issue an injunction to stop the rule.
And during the summer, the CFPB announced that it will no longer supervise lenders to ensure they are complying with the Military Lending Act, a law that protects active duty servicemembers from predatory financial practices. The MLA prevents lenders from charging servicemembers more than 36 percent interest and provides other rights, including protection from forced arbitration. The MLA was enacted in 2006 after a Department of Defense report detailed how widespread predatory lending was harming our troops, their morale, their security clearances, and, consequently, our country’s military readiness.
Meanwhile, Mulvnaey, who has publicly advocated for eliminating the payday lending rule, has stated that he intends to reopen the rulemaking process, aiming for February 2019. Every sign indicates this would be an effort to gut the rule.
If payday lenders succeed in eliminating or watering down the payday lending rule, then millions of cash-strapped Americans will continue to be caught in a crippling cycle of 300 percent-interest loan debt. The predatory lending business model relies heavily on a borrower’s inability to repay their loans, which leads to a cascade of financial consequences that include bank penalty fees, delinquency on other bills, and even bankruptcy. More than 75 percent of payday loan fees are made from borrowers stuck in more than 10 loans a year.
Contrary to lenders’ claims that the rule was rushed or lacked transparency, the agency, under its previous leadership, engaged in extensive research and data analysis to understand more fully the impact these loans have on consumers; coordinated field hearings where views of consumers and lenders were heard; held numerous meetings with consumer advocates and lenders; and found multiple instances of unfair and abusive practices by payday lenders through the agency’s supervision and enforcement process.
The CFPB also studied whether enhanced disclosures could address lenders’ unfair and abusive practices, but both empirical data and field trials demonstrated that they would not. Ultimately, lenders’ incentive to set a long-term debt trap is just too great for disclosures to solve the problem.
At the heart of the rule is the commonsense principle of ability to repay based on a borrower’s income and expenses—which means that lenders will be required to determine whether a loan is affordable to the borrower before making it. An affordable loan is one a borrower can reasonably be expected to pay back without re-borrowing or going without the basic necessities of life – like food or rent money.
While the rule isn’t perfect, it’s an important step forward to protect consumers against the payday debt trap that extracts billions of dollars annually from people with an average income of about $25,000 a year. As written, the payday lending rule will result in fewer families falling into financial ruin. And, it will continue to allow credit to flow to those who can afford it, including loans from community banks and credit unions, who applauded that the final rule will not affect demonstrably less risky loans from financial institutions.
Polls and actual votes cast at the ballot box, including in four states that have recently affirmed interest rate caps, repeatedly confirm that safeguards against predatory payday loans are incredibly popular across political party lines. The rule, which is not preemptive, doesn’t affect states’ abilities to continue to enact stronger protections than the rule establishes.
A year has passed since the payday rule was finalized, and since then payday lenders have worked every angle to preserve a business model that clearly harms working families. It’s time for these predatory lenders and Mick Mulvaney to stop undermining the payday lending rule and allow it to fulfill its purpose — to keep Americans out of dangerous debt traps.
Rebecca Borné is a senior policy counsel at the Center for Responsible Lending.
Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.
Correction: A previous version of this story misstated the name of the Consumer Financial Protection Bureau.