As widely expected, the Consumer Financial Protection Bureau on Tuesday rescinded its rule that requires that payday lenders verify that a borrower is likely to be able to repay the loan before it is approved.
“The Bureau determines that a lender’s not considering a borrower’s ability to repay does not take unreasonable advantage of particular consumer vulnerabilities,” the CFPB said, in rescinding the rule issued under the Obama Administration.
The agency will, however keep some sections of the rule. For instance, under the rule, lenders are limited in the number of withdrawals they can make from a borrower’s bank account. Also, credit unions making loans using the National Credit Union Administration’s PAL I model are given a safe harbor from the rule.
Under PAL I, credit unions can charge an application fee only covering expenses, up to $20. The loans may range from $200 to $1,000, with a loan term of between one to six months. A borrower may take out up to three PALs during a six-month period as long as the loans do not overlap.
The NCUA also has designed a PAL II loan model that allows borrowers to take out loans of up to $2,000, which the CFPB said Tuesday does not fit its definition of payday loan. The maximum interest rate for the loans is 28%, much lower than many payday loans.
CFPB officials said that Tuesday’s decision ensures that people will have access to short-term loans.
“Our actions today ensure that consumers have access to credit from a competitive marketplace, have the best information to make informed financial decisions, and retain key protections without hindering that access,” CFPB Director Kathleen Kraninger said. “The Bureau protects consumers from unfair, deceptive, or abusive practices and takes action against companies that break the law. We will continue to monitor the small dollar lending industry and enforce the law against bad actors.”
In 2017, CFPB Director Richard Cordray issued the strict rule that attempted to rein in the payday lending industry. He said those lenders charged such large fees and high interest rates that they lock a borrower into a cycle of debt.
When the Trump Administration took over the CFPB, agency officials made it clear that they intended to make major changes to the strict rule, arguing that the Obama Administration had not made the legal case for adopting such strict regulations. They said that there is not enough evidence or legal basis for such a rule.
The CFPB decision comes eight days after the U.S. Supreme Court decided that while the structure of the agency was unconstitutional, the bureau could continue to operate as long as its director may be removed by the president at will.
NAFCU President B. Dan Berger said he was pleased that the CFPB was abandoning the ability-to-pay requirement. “Still, more must be done to ensure consumers have access to affordable loan options,” he said. “We firmly believe that community lenders, such as credit unions, must be allowed to serve consumers while the predatory practices of certain payday lenders must be stopped. NAFCU will continue to urge the CFPB to exclude all future payday alternative loans made by credit unions from its rulemaking.”
Democrats and consumer groups Tuesday blasted Kraninger for rescinding the rule, while the trade group representing payday lenders praised it.
“Today, the CFPB gave payday lenders exactly what they paid for by gutting a rule that would have protected American families from predatory loans that trap them in cycles of debt,” Senate Banking Committee ranking Democrat Sherrod Brown of Ohio said. “This new rule—and recent reports that political appointees manipulated research to support the new rule—show just how far the CFPB under Director Kraninger will go to protect President Trump’s corporate cronies instead of consumers.”
The trade group representing payday lenders disagreed. “The CFPB’s action will ensure that essential credit continues to flow to communities and consumers across the country, which is especially important in these unprecedented times,” said D. Lynn DeVault, chairman of the Community Financial Services Association of America.