It seems Richard Cordray, the director of the Consumer Financial Protection Bureau, CFPB, just couldn’t catch a break this week.
As he tried to get people talking about mobile banking technology, his speeches were overwhelmed with heated debates and challenges on the issue of payday loans.
Payday loans are short-term loans, often available in low-income areas, that carry extremely high interest rates and put users in a cycle of heavy debt. In 2010, more than 12 million Americans relied on payday lenders to access credit. According to the Pew Charitable Trust, they took out nearly $30 billion in loans this year alone.
Despite the high interest rates and fees for loans, the payday loan industry appeals to poorer Americans who have limited access to American financial services and banks. Often one payday loan leads to another and another and soon the borrower is stuck in a cycle of debt, which was described most recently in the documentary ‘Spent.’
Thursday, while appearing in New Orleans to talk about mobile financial services, Cordray ended up respond to regulatory demands from the payday loan industry Across the country. The debate surrounding the issue of payday loans has been heated in Louisiana, where efforts to reform the industry failed in the state’s recent legislative session.
Senator Mike Crapo was Cordray’s chief executioner when Cordray appeared before the Senate Banking Committee Wednesday. Cordray suggested that payday loans infect legitimate back alleys of the financial system.
“There is now another question that has been raised: what about illegal lending that works by relying on existing bank payment systems? This is not something that banks like, it is not is not a risk they want to be exposed to.”
When asked by Crapo if the agencies were making a conscious effort to prevent payday lenders from being able to operate, Cordray said he didn’t know.
Unfortunately, it will still be some time before the CFPB is ready to enact new payday loan regulations. During the hearing, Cordray pleaded for more time.
Well worth the extra time to make sure what we do won’t be derided by people bypassing [the rules] just by slightly transforming their product.”
More time could also strengthen the opposition. Cordray has several lawmakers lined up to thwart him. Senator Darrell Issa has previously called on the Justice Department to release all documents related to its efforts to prevent illegal payday lenders and other fraudulent businesses from gaining access to the US banking system. This effort, known as Operation Chokepoint, has come under scrutiny amid allegations that it is pressuring banks to end relationships with legal firms such as payday lenders have emerged.
A group of payday lenders represented by the Community Financial Services Association recently filed a complaint against some of these regulators, alleging that they were unfairly targeted by Operation Chokepoint which paints them as risky associates for the banks. The agencies named in the lawsuit were the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. The CFPB has not been named.