CFPB to Relax Strict Pending Payday Loan Rules

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The country’s new consumer finance watchdog on Wednesday proposed to significantly ease the stringent pending rules on payday loans and other short-term loans designed to prevent lenders from taking advantage of cash-strapped Americans.

Kathy Kraninger’s proposal, who became director of the Consumer Financial Protection Bureau in December after being appointed by President Trump, would remove key provisions requiring lenders to determine whether borrowers can repay short-term loans.

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1:00 p.m. 6 February 2019

An earlier version of this article indicated that new salary rules for Obama candidate Richard Cordray had been proposed. In fact, they were enacted and were to come into effect in August.

Financial industry officials pushed to change the rules and applauded the announcement. Consumer advocates have called it a “gift to payday loan sharks.”

The bureau’s proposal to revise the rules “suggests there was insufficient evidence and legal support for mandatory underwriting arrangements.” adopted in 2017 as Obama Richard Cordray, according to an office Press release. These would be the first federal payday loan rules.

Kraninger also wants to postpone the effective date of the repayment capacity provisions, set for August, to November 2020. However, the office decided to move forward in August with the implementation of the rest of the provisions. 2017 rules pending a Texas court ruling that had delayed all of the regulation. The other rules set new limits for lenders who withdraw payments from customers’ bank accounts.

“The bureau will assess the comments, weigh the evidence, and then make a decision,” Kraninger said of the rule review effort, which begins with a 90-day public comment period. “In the meantime, I look forward to working with other state and federal regulators to enforce the law against bad actors and encourage strong competition in the market to improve the access, quality and cost of credit. for consumers. “

The repayment capacity provisions “would impose substantial burdens on the industry, severely limit product offerings from lenders, and severely restrict consumer choice and access to credit” in states that allow payday loans and other short-term loans, such as those secured by a vehicle title, according to the Regulatory Proposal Office’s notice released Wednesday.

Payday loans are allowed in California and 32 other states, with the rest banning them.

It is estimated that 12 million Americans take out payday loans each year from websites and approximately 14,000 stores. Loans are typically cash advances of a worker’s salary for two to four weeks and have a flat fee of 15% or an interest rate that doesn’t seem particularly high.

But costs can quickly add up if the loan is not repaid, and the effective annual interest rate is actually 300% or more.

Rules passed in 2017 would require payday lenders to pre-determine the ability of potential borrowers to repay short-term loans of 45 days or less. If the short-term loan period expires and the debt is not repaid, borrowers may face painful charges or be forced to refinance the loan, creating what consumer advocates see as a debt trap. .

The ability to pay provisions are “the heart and soul” of the new regulations that were drafted after extensive research, Cordray said Wednesday in an interview.

“You have to reasonably assess that these loans will work before you make one,” he said, noting that Congress has put in place similar restrictions on mortgages and credit cards. “Rolling it back would mean exposing hundreds of thousands of people to massive damage of the kind we have documented every day across this country. “

Cordray rejected the argument that the rule would restrict consumers’ access to credit.

“It restricts access to irresponsible credit. It seems like a reasonable step, ”he said. “The industry thinks it will hurt them because they give a lot of irresponsible credit. They make a lot of money with it and they don’t want to give up that money.

The office took several years to craft the rules, so federal law requires detailed reasoning to change them. The bureau explained its rationale for eliminating repayment capacity warrants in a 171-page file that will appear in the Federal Register, and argued for postponing the implementation of the rules in another 29-page document.

Mick Mulvaney, Acting White House Chief of Staff, who replaced Cordray on an interim basis, joined two industry trade groups to get a federal judge in November to postpone the August effective date for the entire rule due to potential changes that he wanted to bring.

Mulvaney received $ 65,750 in campaign contributions from payday lenders when he was a Republican congressman from 2011 to 2017, according to the non-partisan Center for Responsive Politics. Consumer advocates complained he was biased towards the industry, but Mulvaney said he would not be swayed by the contributions.

Kraninger, a former Mulvaney aide in the White House, was appointed by Trump last year to be the permanent director. After being confirmed by the Senate and accepted the post, she said she would not be Mulvaney’s puppet.

A troubleshooting industry trade group complained that the 2017 troubleshooting restrictions would hurt consumers and said it was satisfied, but not entirely satisfied, with Kraninger’s proposal.

“Under the leadership of former Director Cordray, the office took an unbalanced approach to rule making and crafted a rule based on a partisan political agenda,” said Dennis Shaul, Managing Director of Community Financial Services Assn. from America.

But Shaul said he was disappointed that Kraninger left some provisions in place and called for the 2017 initiative to be “repealed in its entirety.”

Consumer advocates said Kraninger’s decision went too far.

“The Kraninger CFPB is giving a Valentine’s Day gift to payday lenders, helping them continue to trap Americans in crippling debt cycles,” said Rebecca Borné, senior policy adviser at the Center for Responsible Lending.

“The payday rule was developed through years of extensive research and dialogue with stakeholders,” said Borne, whose group is part of a coalition called Stop the Debt Trap that supports regulation. “Scrapping it will particularly hurt communities of color, which payday lenders disproportionately target for predatory loans.”

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