On Feb. 6, 23 free market groups led by the Competitive Enterprise Institute, petitioned Congress to stop the Consumer Financial Protection Bureau’s rule against short-term “payday” loans.
“The CFPB’s rule will make it harder for millions of struggling Americans to cover emergency expenses between paychecks,” said Daniel Press, a CEI policy analyst and author of a recent report on the rule.
The rule, he and other critics say, also deprives state legislators from deciding how to regulate small dollar loans.
Federal legislators have until March 5 to rescind the rule using the Congressional Review Acta and House Joint Resolution 122, introduced by Rep. Dennis Ross (R-Fla.) and co-sponsored by Reps. Alcee Hastings (D-Fla.), Henry Cuellar (D-Texas), Collin Peterson (D-Minn.), Steve Stivers (R-Ohio), and Tom Graves (R-Ga.).
Under the watch of former Director Richard Cordray, the CFPB enacted the controversial rule in October. It was, in his words, “aimed at stopping payday debt traps by requiring lenders to determine upfront whether people can afford to repay their loans.”
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 also 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.
Under the CFPB’s rule, lenders must conduct a “full-payment test” to determine upfront that borrowers can afford to repay their loans without re-borrowing. 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 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.
Signatories to the CEI-spearheaded letter include representatives of: Competitive Enterprise Institute, 60 Plus Association, Americans for Prosperity, Americans for Tax Reform, Council for Citizens Against Government Waste, FreedomWorks, Heritage Action for America, National Black Chamber of Commerce, and the National Taxpayers Union.
H.J. Res. 122, they wrote, requires a simple majority to pass both houses and “if signed by the president, would block the rule from coming into effect and prohibit the CFPB from issuing a similar rule without Congressional authorization.”
The final rule covering payday, vehicle title, and certain high-cost installment loans “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 says. “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.”
According to the CFPB’s own analysis, the rule is expected to reduce industry revenue by 75 percent. The industry predicts that could render up to 80 percent of all lenders unprofitable. For 12 million consumers, at least $11 billion worth of credit will be eliminated.
“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.”
The letter references complaints waged by Sens. Marco Rubio (R-Fla.), John Kennedy (R-L.A.), and James Risch (R-Idaho) in a letter to the CFPB noting that the Small Business Administration found the CFPB to have “grossly violated” their requirements in promulgating the rule.
In the meantime, CFPB Director Mick Mulvaney last month announced that the bureau “may reconsider the Payday Rule.”
April 16, 2018, was established in the final rule as the deadline to submit an application for preliminary approval to become a registered information system under the Payday Rule. “However, the Bureau may waive this deadline… Recognizing that this preliminary application deadline might cause some entities to engage in work in preparing an application to become a RIS, the Bureau will entertain waiver requests from any potential applicant,” he wrote.