The Consumer Financial Protection Bureau (CFPB) moved forward late last week with a proposal that the Obama administration says will end “payday debt traps” despite an outcry from Arkansas’ Attorney General and industry critics of the plan who say it will hurt low and moderate-income families who need access to quick, small-dollar loans.
The consumer watchdog agency championed by President Barack Obama on Thursday (June 2) proposed new rules requiring lenders to take steps to make sure consumers have the ability to repay their payday loans by cutting off bank debit attempts that rack up fees. CFPB officials said the proposed protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment and open-end loans. The CFPB is also launching an inquiry into other products and practices that may harm consumers facing cash shortfalls.
“The Consumer Bureau is proposing strong protections aimed at ending payday debt traps,” CFPB Director Richard Cordray said in statement. “Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt. It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey. By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail.”
Almost as quickly as the new rules were handed down last week, Arkansas Attorney General Leslie Rutledge issued a news release, saying she was disappointed with the federal consumer watchdog’s agency not meeting with state officials across the U.S. to discuss the potential impact and need for new federal regulations.
“By disregarding my request and the concerns raised by many others at the state and federal levels about sweeping federal standards that would govern small dollar lending, Director Richard Cordray has made it clear that he is not interested in cooperative federalism,” said Rutledge said in a statement. “This one-size-fits-all federal approach from an unaccountable bureaucrat and agency ignores the interests of the states and will negate reasonable policies that already exist to protect consumers while at the same time allowing the free market to function properly.”
In late March, Rutledge sent a letter to Cordray asking him to convene a “conference of states” to discuss the framework and ideas in the Obama administration’s proposal requiring lenders to take steps to make sure consumers can repay their loans.
Besides Rutledge’s opposition, other supporters and critics across the U.S. are now responding as to how the new rules may affect consumers. Washington, D.C.-based Financial Service Centers of America (FiSCA), the national trade association representing 5,000-member financial service center locations around the U.S., call CFPB’s new rules “an overly prescriptive regulatory scheme for a most basic form of credit” that ignored academic research.
“Based on these proposed rules, the CFPB has singled out low- and moderate- income Americans who are fully able to make their own financial decisions for discriminatory treatment. By fashioning rules that dismiss the way in which millions of ordinary Americans live their lives the CFPB has denied these people credit and created a new form of redlining,” said FiSCA Executive Director Ed D’Alessio.
Advance America Cash Advance, one of the nation’s largest payday lenders, pointed to its own self-sponsored national survey as proof that the new proposed federal relations will “severely restrict access to credit and could decimate a legal industry.”
“The CFPB’s proposed rules are a direct threat to millions of Americans’ access to affordable, transparent and reliable credit,” said Jamie Fulmer, senior vice president of Advance America. “For the already highly-regulated businesses that offer these consumers’ preferred credit option, particularly smaller lenders, they are a death sentence.”
On the opposite side of the issue, a Brookings Institute economist said the Obama administration’s action on the payday industry is the first step in protecting the non-prime borrower who live paycheck-to-paycheck.
Aaron Klein, in a column for the centrist think tank, wrote that the federal regulation was a “big win” for millions of Americans needing access to small dollar loans but are often face exorbitant interest rates and fees charged by some lenders, which routinely amount to 300 to 400% on an annualized basis.
“The Bureau’s action … will help protect millions of American families who are financially vulnerable and can be subject to abusive lending. One of the key lessons of the financial crisis was that when a lender is able to profit from a loan, regardless of whether the consumer is likely to pay it back, you have a problem,” wrote the Brookings economist. “This type of lending needs to be dealt with head-on through strong regulation. Regulators need to think along these lines and be willing to ban outright or functionally curtail these types of predatory products.”
Among other things, the proposed rule would apply to certain short-term and longer-term credit products that are aimed at financially vulnerable consumers. In drafting the rules last year, the CFPB said it had serious concerns that risky lender practices in the payday, auto title, and payday installment markets are pushing borrowers into debt traps.
Chief among these concerns was the consumers were being set up to fail with loan payments that they are unable to repay. Faced with unaffordable payments, consumers must choose between defaulting, reborrowing, or skipping other financial obligations like rent or basic living expenses like food and medical care. The CFPB also said it is concerned that these practices also lead to collateral damage in other aspects of consumers’ lives such as steep penalty fees, bank account closures, and vehicle seizures.
With its action last week, CFPB will seek input from a wide range of stakeholders by inviting the public to submit written comments on the proposed rule once it is published in the Federal Register, expected any day now. Comments on the proposal are due on Sept. 14, 2016 and will be weighed carefully before final regulations are issued, officials said.
ARKANSAS PAYDAY LOAN HISTORY
While not offering details, Rutledge said her office will review CFPB’s proposed rule from the CFPB and “evaluate the best course of action.”
In 2008, the Arkansas Supreme Court ruled that the Check Cashers Act violated the state constitution because it allowed payday lenders to charge exorbitant interest rates. The state’s constitution specifies that consumer loans, loans for personal use, cannot exceed 17% per year regardless of the discount rate.
After the state high court ruling on the Check Cashiers Act eight years ago, former Arkansas Attorney General Dustin McDaniel demanded that the payday lenders cease their lending practices immediately, void any and all current and past-due obligations of their borrowers, and refrain from any collection activities related to these type loans.
Since that time, most payday loan operators have moved out of the state, including large national chains and publicly-traded companies like Advance America’s Cash Advance Centers, First America Cash Advance, Rushmore Loan Co. and Ace Cash Express, according to Peggy Matson, executive director of Arkansas State Board of Collection Agencies.
Matson said since the 1999 Check Cashiers Act was declared unconstitutional by the state Supreme Court, the state Board of Collection Agencies no longer regulates the industry except for a few operators that offer check-cashing services.
Some lawmakers and staff officials have been briefed or contacted in recent weeks by representatives of some bank-affiliated operators who hope to unveil products similar to the payday lending industry before the end of 2017, according to Talk Business & Politics sources.