Upcoming changes to CFPB’s payday loan rule

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Could it be that the CFPB, under the leadership of the new director general Kathy kraninger, will he act directly to eliminate the most controversial provisions of his payday loan rule? According to sources cited by American banker, CFPB will remove controversial underwriting rules that would have required lenders to establish a borrower’s repayment capacity before offering a short-term loan product for a small amount.

As it is, lenders should check a borrower’s income, debt, and spending habits to assess their borrowing thresholds. Lenders can avoid this stipulation if they change their loan types from payday loans which must be repaid in full on the borrower’s next payday to installment loans, which are paid over a set period of time which is agreed upon at the start of the borrower’s payday. ready.

Supporters of the rule as written note that this provision can help consumers avoid debt traps by preventing them from renewing their unpaid payday loan every 30 days, resulting in new rounds of fees. and costs. Opponents counter that regulation will simply push a majority of short-term lenders out of business because they won’t be able to cope with rising underwriting costs or completely change their business model to accommodate a different subscription type.

Last October, the CFPB announced that he would “review” the rules. Sources are now reporting that the CFPB has decided to scrap the provision altogether.

If these reports are true, the change will almost certainly bring a lot of controversy in its wake. Consumer advocates have long argued that the ability to repay provisions is key to preventing customers from getting locked into debt cycles with short term, low value lenders.

But since the departure of the former general manager Richard Cordray in late 2017 – and under the leadership of CFPB interim director Mick Mulvaney – the agency began to take a different stance on both lenders and the rules created to control them. In April, Mulvaney sided with two payday lending groups that sued the CFPB. to try to overturn regulatory restrictions created by the new rules.

CFPB argued in court that payday lenders would suffer “irreparable harm” as a result of 2017 final pay rule, and that it was “in the public interest” to reopen the regulations.

“Lenders across the market will face substantial drops in their income once the rule’s compliance date goes into effect, which will lead many to exit the market,” the agency said in a motion.

Others, however, are not so sure about the new logic of the CFPB, noting that in the absence of new research on payday loan done over the past year, it is not clear exactly how the CFPB was able to justify its decision to roll back the regulations without ever letting them see the light of day.

“Completely hollowing out the repayment capacity requirement is going to be difficult for the Bureau to defend,” said Casey Jennings, lawyer at Seward & Kissel and former lawyer for the CFPB Regulatory Bureau, who worked on the 2017 rule.

It is expected that in the coming days or weeks (depending on when the the government reopens, among other factors), the CFPB will publish a proposal to reopen the rule for public comment, thus kicking off the process to overhaul the 1,690-page rule from 2016.

The latest proposal is also expected to repeal the limits imposed by the single-consumer repeat-borrowing rule, as well as the underwriting requirements – but it will leave payment provisions that would limit the number of times a lender can try to untouched. extract loan payments. directly from consumers’ bank accounts, according to sources.

It is not the news that makes consumer groups happy.

“We expect the CFPB to weaken the payday rule to the point that it has no practical value,” said Alex Horowitz, senior researcher on the little dollar loan project to Pew Charitable Trusts.

However, this is news that is a great relief for industry groups.

“The rule as previously proposed was really just an attempt to penalize the industry,” said Jamie Fulmer, senior vice president at Advance America in Spartanburg, South Carolina. “There has been a tremendous amount of academic research from both sides that has been put forward, but the Bureau has only dwelled on research studies that supported their positions and rejected the counter-arguments. “

If the rule change goes as planned, the case will likely return to court, with consumer advocates suing the CFPB. Various consumer lawyers have argued that these consumer groups could have a solid chance in court, because under the Administrative Procedure Law they will have to prove that this regulatory change is not “arbitrary and capricious”.

“The underlying research hasn’t changed; the only thing that has changed is the agency director, ”Jennings said. “I think it’s entirely possible that a court will find this arbitrary and capricious. “

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