With Richard Cordray at the helm, the federal Consumer Financial Protection Bureau devoted five years to assessing how best to regulate the payday lending industry. The bureau analyzed data. It talked with stakeholders. It completed the rules in late 2017, or around the time Cordray returned to Ohio to run for governor. An unsympathetic Trump White House balked at their implementation, and a week ago, the new bureau director, Kathleen Kraninger, announced the rules would be pared back dramatically, even gutted, in a word.
That is unfortunate. The rules for payday lenders go to the purpose of the bureau, created in the wake of the financial calamity on Wall Street that deepened the Great Recession. The persuasive thinking was that consumers deserve an advocate to check potential abuses and counter the clout of powerful banking interests.
The payday lending industry was ripe for examination with many consumers trapped in cycles of debt, the record showing half of all payday loans extending at least to 10 consecutive loans, borrowers hit with fees and other costs equivalent to triple-digit interest rates. That isn’t to say the situation is simple. There is the element of personal responsibility. Payday lenders are not forcing consumers to borrow. Many borrowers seek to cover an unexpected expense and complete the payments without problems.
Yet the record shows others are vulnerable and easily exploited. Thus, the bureau did not go overboard in its regulations. Most notably, it arrived at a rule requiring that lenders verify borrowers could pay back their loans on time. This echoes what banks routinely do to protect their own position. The bureau also called for a “cooling off” period. Lenders were prevented from making more than three-consecutive loans to a borrower without taking a break.
Both of these requirements have been eliminated, as urged by payday lenders. Under its new leadership, the bureau contends the removal will encourage competition among lenders and thus expand options for consumers. The bureau did preserve a rule denying lenders access to a borrower’s bank account, previously available after failed attempts to collect.
Yet, in a substantial way, the landscape remains as it was when the bureau first took up the regulatory task, too many consumers targets for exploitation.
Twenty states have outlawed payday lenders. Others recognize a void the lenders fill in providing short-term credit. One of those is Ohio, which wrestled for a decade with the regulation of payday lenders and then arrived last year at what the Pew Charitable Trusts calls a national model for payday loan reform. Bipartisan majorities at the Statehouse placed limits on the size and length of loans. They capped fees and interest (at 60 percent of the original principal). They barred loans under 90 days unless the monthly payment does not exceed 7 percent of a borrower’s monthly net income.
These and other requirements, including sample repayment schedules to establish affordability, are designed to give consumers protection while leaving room for lenders to succeed. With its head start on reform, Colorado has demonstrated that both objectives can be achieved.
That was the spirit of the process launched under Richard Cordray. The approach did not close off the possibility of adjustments to the rules as dictated by circumstances, Ideally, other sources of short-term credit would emerge, and some have. As it is, a regulatory check is required for payday lenders, something familiar and necessary in other industries to soften the rough edges of the marketplace. The Consumer Financial Protection Bureau worked hard to get the rules right. Now key ones have been erased.