The rules could radically reshape the payday lending industry by requiring firms to verify that borrowers can afford the debt and capping the number of times someone can take out successive loans. The rules are likely to “restrict” the industry’s revenue by two-thirds, largely by limiting repeat loans, according to the CFPB.
“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” CFPB Director Richard Cordray said in a statement. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”
Payday loans are a small, scorned part of the financial industry. But in the states where such lenders are legal, they are pervasive — there are almost as many payday lenders as McDonald’s and Starbucks in the United States. About 12 million Americans take out such each year, spending more than $7 billion on loan fees, according to Pew Charitable Trusts. And the $40 billion industry has warned that the CFPB’s rules could force some of the nation’s thousands of payday lenders out of business and push their borrowers into more expensive financial arrangements such as using pawnshops.
The rules will “cripple” and “devastate” the industry, said Edward D’Alessio, executive director of the Financial Service Centers of America. “The rule will force the doors to close on hundreds of store fronts across the country, threatening 60,000 jobs,” he said.
The CFPB says it still expects more than 90 percent of payday borrowers to be able to obtain a loan, but it has been highly critical of the industry, which the agency says profits from trapping cash-strapped workers in a vicious cycle of borrowing. For example, the CFPB has said that about 80 percent of payday loan customers don’t pay off their first loan and have their debt rolled into another loan. About 45 percent of payday customers take out at least four loans in a row. And the loans often come with steep fees. Borrowers pay a median $15 in fees for each $100 they borrow, amounting to an annual percentage rate of 391 percent on a median loan of $350, according to the CFPB. The CFPB rules do not address the interest that payday lenders can charge.
“Payday lenders have exploited loophole after loophole to trap working people in debt, and this rule will help put an end to their abusive practices,” said Sen. Sherrod Brown (D-Ohio).
The rules finalized Thursday require payday lenders to determine whether someone can pay back their loan without having to take out another one, including checking their credit reports. It also says borrowers cannot take out more than three loans in quick succession. In addition to the payday loans borrowers take out with the expectation that they’ll repay their debt with their next paycheck, the rules also apply to auto title loans, which requires borrowers to put up their car or truck title for collateral, and longer-term loans with balloon payments.
The rule should go into effect sometime in 2019.
The CFPB did not take into consideration the needs of consumers who use and like payday loans, said Dennis Shaul, chief executive of the Community Financial Services Association of America, the primary industry group for payday lenders. “We as much as anybody else do not want to see a customer injured” by a payday loan and are open to new regulations, he said. But there is a better, simpler way for the CFPB to go about it, he said, noting that the rule spans 1,600 pages.
The industry is weighing whether to challenge the rules through Congress or filing a lawsuit, said Shaul. “We have to weigh our options and have to think that through,” he said. “There are a variety of things we can do.”
But consumer advocates dismissed industry complaints, noting that the CFPB worked on the rule for several years. The agency already changed aspects of the rule in response to industry comments, said Mike Calhoun, president of the Center for Responsible Lending. “The data shows that the vast bulk of these loans are debt traps,” he said.
The rules are also likely to agitate the CFPB’s already frustrated critics. The agency, a consumer watchdog established after the global financial crisis, has been attacked by Republicans on Capitol Hill who say it needs to be reined in and to be more accountable to Congress. More than a dozen U.S. banks and business groups sued the agency last week in a last-ditch effort to block another set of rules that make it easier for consumers to band together and sue their credit card companies and other financial institutions.
One of the agency’s chief critics, Rep. Jeb Hensarling (R-Tex.), has accused Cordray of allowing his political ambitions to influence the payday lending rules. “Your personal political ambitions may be informing decisions you are making regarding what is supposed to be a nonpartisan and objective agency-rule-making process governed by the Administrative Procedure Act,” Hensarling said in a letter to Cordray in August.
Cordray has declined to comment on rampant speculation that he plans to run for governor of Ohio, where he once served as state attorney general. He has also become a target because he is one of the few remaining financial regulators appointed during President Barack Obama’s administration still in office. His term doesn’t end until next year.
Still, conservative critics of Cordray immediately pounced on the payday rules Thursday saying it would “put an even stronger chokehold on American consumers and economy.” “As the Trump administration successfully continues to roll back harmful, Obama-era policies, the next place they should look to continue this effort is to immediately freeze all CFPB rules,” Ken Blackwell, former adviser to the Trump transition team and former Ohio state treasurer, said in a statement.