NEW YORK (AP) – The country’s federal financial watchdog said on Wednesday it plans to scrap most of its critical consumer protections governing payday lenders.
The move is a major victory for the payday loan industry, which has argued that government regulations could kill much of its business. It’s also a big loss for consumer groups, who say payday lenders exploit the poor and disadvantaged with loans that have annual interest rates of up to 400%.
The cornerstone of the regulation was the requirement for lenders to ensure that borrowers could afford to repay a payday loan without being stuck in a cycle of indebtedness, a standard known as ‘repayment capacity’. “. This standard would be removed under the new rules. Another part of the rules, which would have limited the number of payday loans a person could renew, was also removed.
Critics of the payday loan industry have argued that without these underwriting standards, the new CFPB regulations are effectively toothless. The main criticism of the payday lending industry was that many borrowers would take months to pay off a loan that was originally designed to last only a few weeks, renewing the loan over and over again.
“This proposal is not an adjustment to the existing rule … it is a complete dismantling of consumer protections (the office) finalized in 2017,” said Alex Horowitz, researcher at Pew Charitable Trusts, a think tank whose Industry research was widely relied on by the bureau when the original rules were unveiled a year and a half ago.
The announcement was the first regulatory abolition under the new director of the Consumer Financial Protection Bureau, Kathy Kraninger, who took over the office late last year. Mick Mulvaney, who was appointed by President Donald Trump as interim director of the office in late 2017, announced a year ago that the office intended to review the rules. As a South Carolina congressman, Mulvaney received tens of thousands of dollars in political donations from the payday loan industry, raising concerns that he is too tied to the industry to regulate it. appropriate way.
The Community Financial Services Association of America, a payday lending group, holds its annual conference in March at Trump’s Doral Golf Club in Miami. He also held his conference there last year. Government watch groups have criticized the use of Trump hotels and resorts by businesses and lobby groups as legal bribery, a way to influence regulation and policy by giving money to the president.
The CFSA did not respond to an Associated Press request for comment on this review, but sent a statement saying it was “disappointed” with some regulations left untouched and that its members were anxious to return to the Doral this year.
“The venue is popular with our members and meets our needs,” said Dennis Shaul, CEO of CSFA.
Under the Obama administration, the CFPB spent nearly five years working on a process to finally nationalize the regulation of the payday lending industry, which is primarily regulated at the state level. The office began the process in 2012 and its finalized rules were completed at the end of 2017. These were the last major regulations developed under the leadership of Richard Cordray, the office’s first permanent director, before he left the office.
“I think this is a bad development for consumers,” Cordray said. “We looked at this industry carefully and there was a common problem of borrowers trapped in long-term debt. We had come up with what I saw as a modest proposal. The change is really disappointing and rushed.”
CFPB proposed to retain part of the payday loan regulation: a ban on the industry from making multiple debits to a borrower’s bank account, which consumer advocates say has caused hardship for borrowers due to overdraft fees. In a statement, the CFSA said the repeal of the CFPB did not go far enough and would also have liked the debit regulations to be removed.
The proposed new rules are subject to a 90-day public comment period. It is almost certain that the proposed changes will face legal challenges, as the office deviates dramatically from its previous position, something federal regulators are generally not allowed to do under the law.
AP Business Writer Bernard Condon contributed to this New York report.
Ken Sweet covers Banks and the Consumer Financial Protection Bureau for the Associated Press. Follow him on Twitter at @kensweet.