The Consumer Financial Protection Bureau this week proposed to rescind sections of a 2017 rule targeting small-dollar lending, including payday and vehicle title loans.

The proposal, made public on Feb. 6, is related to another seeking comment on whether the Bureau should delay the Aug. 19, 2019, compliance date for relevant portions of the 2017 Final Rule.

Payday loans are typically for small-dollar amounts and due in full by the borrower’s next paycheck, usually two or four weeks. They can be expensive, with annual percentage rates that can reach 300 percent or higher. Single-payment auto title loans have expensive charges and short terms, but borrowers are also required to put up their car or truck title for collateral.

Some lenders also offer longer-term loans of more than 45 days where the borrower makes a series of smaller payments before the remaining balance comes due. These longer-term loans, often referred to as balloon-payment loans, may require access to the borrower’s bank account or auto title.

In October 2017, facing down Republican opposition and industry petitions and protests, the CFPB—under the leadership of former director Richard Cordray—finalized a long-gestating rule “aimed at stopping payday debt traps by requiring lenders to determine upfront whether people can afford to repay their loans.”

The 2017 rule

The consumer protections promulgated in 2017 covered loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments. The rule also curtailed lenders’ “repeated attempts to debit payments from a borrower’s bank account, a practice that racks up fees and can lead to account closure.”

According to research cited by the CFPB at the time of the rulemaking, more than four out of five payday loans are reborrowed within a month—usually right when the loan is due or shortly thereafter. Nearly one-in-four initial payday loans are reborrowed nine times or more, with the borrower paying far more in fees than they received in credit.

Under the CFPB’s rule, lenders must conduct a “full-payment test” to determine upfront that borrowers can afford to repay their loans without reborrowing. For certain short-term loans, lenders can skip the full-payment test if they offer a “principal-payoff option” that allows borrowers to pay off the debt more gradually.

Lenders are required to determine whether the borrower can pay the loan payments and still meet basic living expenses and major financial obligations both during the loan and for 30 days after the highest payment on the loan. For payday and auto title loans that are due in one lump sum, full payment means being able to afford the total loan amount, plus fees and finance charges within two weeks or a month. For longer-term loans with a balloon payment, full payment means being able to afford the payments in the month with the highest total payments on the loan.

“The real story is how Trump’s CFPB can see that this is an industry that regularly thumbs its nose at the law, yet at the same time believes consumers should have fewer protections from shady companies like Cash Tyme.”

Jeremy Funk, Spokesman, Allied Progress

The rule also requires lenders to use credit reporting systems registered with the Bureau to report and obtain information on certain loans covered by the proposal. It allows less risky loan options, including certain loans typically offered by community banks and credit unions, to forgo the full-payment test. It also includes a “debit attempt cutoff” for any short-term loan, balloon-payment loan, or longer-term loan with account access and an annual percentage rate higher than 36 percent that includes authorization for the lender to access the borrower’s checking or prepaid account. The rule also caps the number of short-term loans that can be made in quick succession at three.

Backtracking

It didn’t take a crystal ball to predict the rule might not endure for the long haul.

In January 2018, Mick Mulvaney—the then-newly placed acting director of the CFPB to replace Cordray—took the first step towards delaying, if not killing, the rule.

“The Bureau intends to engage in a rulemaking process so that the Bureau may reconsider the Payday Rule,” he wrote.

Providing Mulvaney needed firepower, one month later in February 2018, 23 free market groups, led by the Competitive Enterprise Institute, petitioned Congress to intervene and stop the rule—perhaps by using the Congressional Review Act.

The rule “is one of the most detrimental regulations ever issued by the CFPB, an unaccountable and unconstitutional agency established by the Dodd-Frank Act,” the letter said. “Put forward under the guise of consumer protection, the rule would strip valued financial services away from some of the most vulnerable people in society. If Washington regulators take away access to legitimate credit options, that will not end consumers’ need for emergency credit. Instead, a ban on small-dollar loans would drive borrowers toward worse options, such as defaulting on financial obligations like rent or seeking out unregulated lenders and loan sharks.”

“The CFPB rule also prevents the citizens and lawmakers in every state from deciding for themselves how to regulate small-dollar loans,” the letter adds. “In fact, every state already regulates small-dollar loans to some extent, including 18 states and the District of Columbia that effectively prohibit such loans.”

Notice of proposed rulemaking

The provisions of the Rule, which the Bureau proposes to rescind, include:

  • specify that it is an unfair and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms;
  • prescribe mandatory underwriting requirements for making the ability-to-repay determination;
  • exempt certain loans from the mandatory underwriting requirements; and
  • establish enhanced reporting and recordkeeping requirements.

Dennis Shaul, CEO of the Community Financial Services Association of America—a trade association representing the payday lending industry—was, in an overall assessment, pleased by the rethinking of rules affecting small-dollar lending.

“However, we are disappointed that the CFPB has, thus far, elected to maintain certain provisions of its prior final rule, which also suffer from the lack of supporting evidence and were part of the same arbitrary and capricious decision making of the previous director,” he says. “We believe the 2017 final rule must be repealed in its entirety.”

“We do hope that the CFPB will also address illegal and unlicensed lenders operating in the shadows,” Shaul added. “Continuing to target legal and licensed state-regulated lenders through regulatory restrictions on their ability to offer short-term credit options will push consumers into dangerous, harmful alternatives.”

Perhaps getting a jump on critics poised to criticize a “consumer protection” agency for backing away from protections against what they see as barely legal usury, the day before the proposed rescissions were announced, the CFPB reached a settlement with Cash Tyme, a payday lender with a presence in several states.

According to the consent order, the Bureau found that Cash Tyme violated the Consumer Financial Protection Act of 2010 by:

  • failing to take adequate steps to prevent unauthorized charges;
  • failing to promptly monitor, identify, correct, and refund overpayments by consumers; and
  • making collection calls to third parties named as references on borrowers’ loan applications that disclosed or risked disclosing the debts to those third parties, including to the borrowers’ places of employment.

Also, the Bureau found that the company violated the Gramm-Leach-Bliley Act and Regulation P by failing to provide initial privacy notices to borrowers. It similarly violated the Truth in Lending Act and Regulation Z when it failed to include a payday loan fee charged to Kentucky customers in the annual percentage rate in loan contracts and advertisements and rounding APRs to whole numbers in advertisements.

Under the terms of the Feb. 5 consent order, Cash Tyme must pay a civil money penalty of $100,000.

Consumer advocates were not won over by the enforcement effort. Among their criticisms is that the settlement didn’t order Cash Tyme to pay restitution to harmed borrowers.

“At this point it’s a ‘dog bites man’ story when a payday lender is busted for illegally ripping off consumers,” says Jeremy Funk, spokesman for Allied Progress. “The real story is how Trump’s CFPB can see that this is an industry that regularly thumbs its nose at the law, yet at the same time believes consumers should have fewer protections from shady companies like Cash Tyme.”

“On the heels of reports last week that two major payday lending companies and a sub-prime auto lender put up quarterly profits collectively exceeding $200 million, a payday lender getting off with a $100,000 fine for a stack of violations seems meager and not much of a deterrent for other lenders considering engaging in abusive and deceptive practices,” he added.

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