A federal banking agency announced Wednesday that it plans to roll back Obama-era restrictions on payday and vehicle title loans — a lending practice that many experts consider to be predatory.
The Consumer Financial Protection Bureau proposed rescinding the rule that required lenders who provided “Payday, Vehicle Title, and Certain High-Cost Installment Loans” to make an effort to find out whether borrowers could afford to pay back the loan.
The Trump administration's effort to rescind the rule came after the director appointed by President Barack Obama, Richard Cordray, departed the agency and was replaced by Mick Mulvaney, who now serves as Acting White House Chief of Staff.
The CFPB argued in a statement that the agency believed rescinding the rule and not requiring lenders to underwrite their loans would increase consumers' access to credit.
“The Bureau is concerned that these provisions would reduce access to credit and competition in states that have determined that it is in their residents’ interests to be able to use such products, subject to state-law limitations,” the agency said in its statement.
Critics are worried that payday lenders take advantage of impoverished Americans who often turn to them for small dollar loans in a pinch. These high-interest loans can force financially vulnerable people into a trap of loans, renewals and exorbitant fees that lead to more debt.
The 2017 rule that would have limited the practice is a holdover from the past administration and was finalized under Cordray, who resigned his position in 2018 to run for governor in Ohio.
Cordray said on Wednesday that the Trump administration's action favors the "profits of payday lenders" over "some of the hardest-hit consumers."
"The move to unwind the rule is based on a claim of protecting 'access to credit' — but credit that is offered without regard to the borrower’s ability to repay is irresponsible and often predatory," he said in a statement. "Extensive data analysis shows this is true for payday lenders. The Trump administration’s political efforts to roll back the rule will hurt those who are being abused and mistreated by ruinous loans. So today’s action should be and will be subject to a stiff legal challenge."
The key part of the 2017 rule had not yet taken effect yet, and now it does not appear that it will.
The public, however, has 90 days to comment on the proposed changes to the rule, which is not being fully removed.
Kathy Kraninger, who has served as the director of the CFPB for two months, said her agency would read the comments before it made a final decision.
“In the meantime, I look forward to working with fellow state and federal regulators to enforce the law against bad actors and encourage robust market competition to improve access, quality, and cost of credit for consumers,” Kraninger said.
One aspect of the rule that will continue to be enforced is a provision that does not allow payday and other lenders from continuing to withdraw from a borrowers account after it has failed in two consecutive attempts. Lenders are also required to give consumers written notice before they start withdrawing money from their bank accounts as well as if they make any withdrawals on different dates or of different amounts or payment channels.
CFPB said that it was delaying the compliance of that date from August 2019 to November 2020.
“These provisions are intended to increase consumer protections from harm associated with lenders’ payment practices,” the agency said in a statement.
Alex Horowitz, the senior research officer with Pew Charitable Trusts consumer finance project, warned that the rule change would leave the 12 million Americans who use payday loans annually unprotected from predatory interest rates, which average 400 percent.
"This proposal is not a tweak to the existing rule; instead, it's a complete dismantling of the consumer protections finalized in 2017," Horowitz said in a statement. "The rule was working. Lenders were making changes even before it formally took effect, safer credit was already starting to flow, and harmful practices were beginning to fade."
Lending groups, however, celebrated the decision. Some even pushed for CFPB to rescind the rule in its entirety.
The Community Financial Services Association of America, a group that sued the CFBP over its rule against payday lending, said that it was pleased with the announcement, but added that it did not think the current director’s decision went far enough.
Critics of the new policy said this fulfilled their fears that the Trump administration was working to undo consumer protections and would put financially vulnerable Americans at risk.
“Kathy Kraninger is siding with the payday loan sharks instead of the American people,” said Rebecca Borné, senior policy counsel at the Center for Responsible Lending. “The CFPB, under a previous director, spent five years developing these consumer safeguards, taking input from lenders, faith leaders, veteran and military organizations, civil rights groups, consumer advocates, and consumers from across the country.”