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Federal consumer agency proposes gutting protections on payday loan debt traps

Payday-loan-store

Photo: Aliman Senai

The Consumer Financial Protection Bureau said Wednesday that it’s proposing to roll back payday lending protections. The bureau is proposing to rescind the requirements that lenders make sure consumers can repay payday loans before issuing them.

While the bureau contends the changes will increase consumer access to credit, consumer groups say it's gutting consumer protections.

The bureau also proposed to push back the date lenders must comply with the rule from this August to November 2020.

“The Consumer Financial Protection Bureau, under Director Kathy Kraninger, has officially given predatory debt traps its seal of approval,” said Mike Litt, consumer campaign director for U.S. PIRG, a consumer advocacy organization. “By proposing to get rid of its underwriting requirement, the CFPB is gutting its own protections.”

The protections were already a compromise, Litt said.

“Just this year, in an overwhelming citizen ballot vote, Colorado became the 16th state (along with D.C.) to cap loans at 36 percent APR,” he said. “This served as an important alternative to allowing triple-digit payday debt traps. But consumers in other states need protection too.”

The bureau is prohibited from setting interest rate caps. So under previous Director Richard Cordray, the bureau issued a rule requiring lenders to check if a customer can repay the high-interest rates.

These protections were the result of a five-year study of the problem, Litt said. “After all that, today’s proposal is a reckless rubber-stamping of predatory lending.”

U.S. PIRG’s 2016 analysis of written complaints to the bureau about payday loans found evidence of the major problem with payday loans: Borrowers can’t afford these loans and end up stuck in a cycle of debt. Ninety-one percent of written complaints were related to the unaffordability of payday loans.

The rollback of the payday loan regulations is a big win for the payday loan industry.

Mick Mulvaney, who was appointed by President Donald Trump’s as acting director of the bureau in 2017, received tens of thousands of dollars in political donations from the payday lending industry, raising concerns he was too connected to the industry to appropriately regulate it, according to a Detroit News article. Mulvaney, now Trump's acting chief of staff, announced a year ago that the bureau was going to revisit the payday lending rules.

Banking and credit union groups also supported rolling back the regulations.

The bureau did keep part of the 2017 final rule. The payment provisions prohibit payday lenders from making a new attempt to withdraw funds from an account where two consecutive attempts have failed unless consumers consent to further withdrawals. The payment provisions also require payday lenders to provide consumers with written notice before making their first attempt to withdraw payment from their accounts and before later attempts that involve different dates and amounts. This helps reduce overdraft fees.

Many consumers get into trouble with payday loans when they can’t quickly repay them. If they’re unable to repay the loan at the end of the term, expensive additional fees are charged. Consumers can get stuck in a payday loan cycle for a long time because they have to keep borrowing money to pay back the money they owe. Payday loans are also much more expensive than other methods of borrowing money. In most cases, the APR on a payday loan average about 400 percent or more.

The bureau will accept comments on postponing the payday loan rule for 30 days and, separately, on rescinding the underwriting requirement for 90 days before making a decision. See https://files.consumerfinance.gov/f/documents/cfpb_payday_nprm-2019-reconsideration.pdf and https://files.consumerfinance.gov/f/documents/cfpb_payday_nprm-2019-delay.pdf for information about where comments can be made.

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