NEW YORK — The nation's federal financial watchdog said Wednesday that it plans to abolish most of its critical consumer protections governing payday lenders.
The move is a major win for the payday lending industry, which argued the government's regulations could kill off a large chunk of its business. It's also a big loss for consumer groups, who say payday lenders exploit the poor and disadvantaged with loans that have annual interest rates as much as 400 percent.
Under President Obama, the CFPB spent close to five years working on a process to finally nationalize the regulation of the payday lending industry, which is mostly regulated at the state level. The bureau started the process back in 2012 and its finalized rules were finished in late 2017. It was the last major piece of regulation overseen by Richard Cordray, the bureau's first permanent director, before he left to run for Ohio governor.
"I think this is a bad development for consumers," said Cordray, a former Ohio attorney general who lost to Republican Mike DeWine in the November gubernatorial election. "We looked carefully at this industry and there was a common problem of borrowers getting trapped in long-term debt. We had put together what I considered to be a modest proposal. The change is really disappointing and hasty."
U.S. Sen. Sherrod Brown of Ohio, a potential 2020 presidential candidate and the ranking Democrat on the Senate Committee on Banking, Housing, and Urban Affairs, released a statement slamming the plan announced by CPFB Director Kathy Kraninger.
“Eliminating these common sense protections will result in millions of hardworking families trapped in a cycle of debt and poverty,” Brown said. “The CFPB is helping payday lenders rob families of their hard-earned money.”
The CFPB’s payday lending rule was the result of several years of study, stakeholder feedback, and research that demonstrated the harm predatory payday lenders do to working families and the economy.
The cornerstone of the regulations was a requirement that lenders make sure borrowers could afford to repay a payday loan without being stuck in a cycle of debt, a standard known as "ability to repay." This standard would be eliminated under the new rules.
Critics of the payday lending industry have argued that without these underwriting standards, the CFPB's new regulations are effectively toothless. The main criticism of the payday lending industry was that many borrowers would take months to repay a loan that was originally designed only to last a couple of weeks.
"This proposal is not a tweak to the existing rule ... it's a complete dismantling of the consumer protections [the bureau] finalized in 2017," said Alex Horowitz, a researcher with Pew Charitable Trusts, a think tank whose research on the industry was relied on heavily by the bureau when the original rules were unveiled a year and a half ago.
The announcement was the first rollback of regulations under Kraninger, who took over the bureau late last year. Mick Mulvaney, who was appointed by President Donald Trump as acting director of the bureau in late 2017, announced a year ago that the bureau was intending to revisit the rules. As a congressman from South Carolina, Mulvaney 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. The industry's ties to former Ohio House Speaker Cliff Rosenberger, R-Clarksville, are part of an FBI investigation into possible extortion, bribery and violations of the Travel Act that led to his resignation last year.
Before October, when a new state law signed by former Gov. John Kasich capped the annual percentage rate of interest on small-dollar loans at 60 percent, the consumer-focused Center for Responsible Lending said Ohio had the highest payday loan rates in the country with an average interest rate of 667 percent.
The payday loan industry welcomed Kraninger's rollback plan Wednesday, with one of its top lobbyists saying the CPFB should be even more aggressive in dismantling its Cordray-era agenda.
The Community Financial Services Association, a group led by Akron native Dennis Shaul, said in a news release Wednesday that the CFPB's plans are “good first steps" that recognize "some of the critical flaws" of the bureau as carried out under Cordray, whom he accused of "arbitrary and capricious decision-making."
Shaul said the CFPB should address illegal and unlicensed lenders "operating in the shadows," but he stressed that the lenders represented by his organization fulfill an important need.
“During the previous comment period, our customers spoke out in record numbers against the rule and the negative impact it will have on their ability to access credit. More than one million comments were submitted, which the Bureau largely ignored during the Cordray era."
The CFPB did propose keeping one part of the payday lending regulations: a ban on the industry from making multiple debits on a borrower's bank account, which consumer advocates argued caused borrowers hardship through overdraft fees. In its statement, Shaul's group said that regulation should be eliminated as well.
The proposed new rules are subject to a 90-day comment period by the public. The changes are almost certain to face legal challenges, since the bureau is taking a radical departure from its previous position.