by Dennis Kelleher (originally appeared in The Hill)
To protect Main Street Americans — consumers, investors, homeowners, students, soldiers, retirees and the elderly — from predatory financial behavior and financial instability that can lead to devastating financial crashes like 2008, the Dodd-Frank law created the Consumer Financial Protection Bureau (CFPB).
It was designed to be and has been a powerful, independent and effective consumer cop policing the Wall Street beat.
In its first five years, the CFPB established itself as one of the most successful consumer and financial protection agencies ever. In addition to implementing numerous rules to protect consumers and stop predatory financial behavior, it has required the industry to return more than $12 billion to 30 million Americans who have been ripped off, cheated or swindled by the financial industry.
Regrettably, that type of consumer protection dropped dramatically when the Trump administration’s anti-consumer appointees took over the CFPB. Director Kathy Kraninger’s recent first major rulemaking proves this by proposing to gut the payday lending rule.
This proposal is so egregious that is effectively changes the Consumer Financial Protection Bureau into the Financial Predator Protection Bureau.
The CFPB is proposing two indefensible changes to the payday lending rule:
- eliminating the “ability to repay” underwriting requirements for extending a payday loan, essentially greenlighting lending to people who do not have the ability to repay a loan.
- eliminating the “reborrowing limits” by any single borrower, allowing the payday lender to keep lending to the borrower who cannot repay so that they can repay the original loan that they can’t repay.
These changes will create a debtor’s prison without bars. They will put borrowers on an endless cycle of debt that they can never get out of while the payday lender keeps charging and collecting fees, penalties and interest from the loans rolled over and over again. Remember that many of these loans have interest rates of up to 400 percent. No wonder it is a $38.5 billion industry.
Compounding the economic harm, payday lenders typically if not always require direct access to a borrower’s checking, savings and/or debit accounts, which they automatically withdraw funds from to repay the loan or the fees, penalties and interest.
That means the borrower not only sinks further and further into debt to the payday lender but that the payday lender gets paid before anyone else, like the landlord, the grocer or the pharmacist.
Remarkably, the CFPB itself discloses the insanity of their proposed changes: It states that the ability to repay requirement would result in two-thirds of payday lender customers not qualifying for a first loan.
Put differently, today two-thirds of payday lender customers do not have the ability to repay the loan they are receiving, which makes reborrowing inevitable.
In real numbers, the CFPB “estimates that the number of loans made to approximately 12 million borrowers would be cut in half, and that loan volume would decrease by roughly 90 percent” because those borrowers could not repay the loan at the time of getting the loan.
Rather than being concerned that lenders were making loans to people who they know cannot pay back the loans, the CFPB is now worried that “roughly three out of four payday store fronts would close and as many as 9 out of 10 vehicle title storefronts would close.”
That’s not a consumer protection agency; it’s a predator protection agency.
The agency tries to justify the proposed changes by claiming to be concerned that borrowers would lose access to credit. That’s lunacy. Banks and lenders deny credit to people who can’t afford to pay them back. That’s exactly what they are supposed to do: You’re not supposed to get a loan that you cannot repay.
The CFPB also says that payday lenders would suffer “irreparable harm” due to “substantial decreases in revenue,” causing “many to exit the market.”
There should be no market for lenders knowingly making loans to people who cannot repay them unless they take out another loan that they also cannot repay to repay the first loan they never should have received.
These practices bear a striking resemblance to the subprime lending business model that led to the 2008 crash:
- The subprime mortgage industry preyed on the most economically vulnerable people who lived on the edge, many of whom didn’t understand the terms of the loans or were outright defrauded.
- At the core of the subprime industry was the “originate-to-distribute” model, where lenders took fees for the loans up front, had no skin in the game and passed along poorly underwritten (if underwritten at all) loans.
- That industry only got away with its actions because there were no regulatory cops on the financial consumer protection beat to stop them.
- Compounding the problem was the fact that when state regulators used state consumer protection laws to stop predatory subprime lending practices, federal regulators sued them, claiming federal preemption prohibited the states from enforcing their own laws. The irony is that this is precisely why the CFPB was created.
This is not to say that payday lenders will cause another crash, although consumer abuses and predatory practices are often the leading edge of industry developments that result in crashes. However, even if that’s not likely, that wasn’t the only reason the Dodd-Frank law was passed.
Protecting financial consumers was one of the primary reasons for that law, and these abusive lending payday practices are exactly why the CFPB needs to exist. This proposed rule should be withdrawn and the CFPB should get back in the business of protecting vulnerable consumers who desperately need a cop on the Wall Street beat.