The Consumer Financial Protection Bureau has announced plans to rescind its payday loan rule designed to protect consumers from short-term, high-interest loans. The proposed changes would be one of the first major political implementations of new director Kathy Kraninger.
Created in 2018, the Payday loan rule aimed at protecting consumers from bad lending practices and repayment abuse. The cancellation of some of its provisions, which is due to take effect in November 2020, has warned consumer advocates of a major setback in consumer protection.
Why the payday loan rule is relaxed
The payday loan rule prohibited these lenders from granting loans to consumers who could not afford to repay them. The rule also prohibits lenders from continuing to allow automatic withdrawals from accounts receivable after two consecutive failed attempts, thereby protecting clients from overdraft fees.
Critics of the payday loan rule say there was insufficient data the CFPB used to create the rule. Representative Dennis Ross, the godfather of the bill passed to overturn the rule, expressed his position in a series of tweets in February of last year.
“If @CFPB is to regulate, it has to do it with proper data,” Ross tweeted. “The CFPB hasn’t done anything that looks like exhaustive research for five years. They scoured what little data they selected.
The written rule is 1690 pages long; 90% of the document is based on research, data and rationale to support the rule, according to the american banker.
Ross also claims that the regulation of payday loans “will hurt low-income Americans” who depend on them. In the same thread, Ross asserts that consumers do not fall into the “debt traps” often associated with loans, stating that “Florida, South Carolina and Illinois have each found that consumers of payday loans leave the market over time ”.
Data Pew Charitable Trusts finds that 76 percent of payday loans are taken out to repay elders. Consumer advocates are wary of the flashback, saying it does more harm to consumers than good.
“The payday rule was developed through years of extensive research and dialogue with stakeholders,” says Rebecca Borné, senior policy advisor at the Center for Responsible Lending. “Scrapping it will particularly hurt communities of color, which payday lenders disproportionately target for predatory loans.” The CFPB’s action today should be a call to action for Americans to speak out against the financially crippling practices of payday lenders.
Why payday loans are so controversial
Payday loans target low-income consumers with poor or no credit scores; about 12 million Americans are provided with cash through loan programs. To get a loan, clients don’t need a Social Security number or credit history; they simply provide ID, employment verification, and banking information to receive a loan.
The arguments against payday loans claim that they target and benefit vulnerable consumers. Subprime loans are often charged at huge interest rates (up to 400%, according to Creditcards.com) and trap consumers in cycles of debt. A study finds that up to 40 percent of payday loan clients do not know when they will be able to repay their loan.
Newer and safer alternatives to payday loans carry their own set of risks. Installment loans, for example, are less costly for the consumer, according to Pew Charitable Trusts. However, these loans also charge a lot of origination fees and come with unnecessary and often unnecessary options for add-ons at the time of purchase.
The agency said it would accept public comments on the new measure shortly.