Little Rock-based Southern Bancorp announced its vehement opposition to a new proposed rule change by the Consumer Financial Protection Bureau (CFPB) that some consumer advocates say would water down rules that prevent payday loan operators and other predatory lenders from pushing high-interest loans on unwitting borrowers.
On Feb. 6, the CFPB proposed to rescind certain Obama-era provisions of its 2017 final rule governing “Payday, Vehicle Title, and Certain High-Cost Installment Loan,” which lenders make certain underwriting determinations before issuing payday, single-payment vehicle title, and longer-term balloon payment loans.
Southern Bancorp officials said they were concerned about the rollback of a CFPB requirement that payday lenders first determine a potential borrower’s ability to repay the loan before making the loan. The rule, they said, was meant to lessen the possibility of individuals falling into the infamous payday lending debt trap, whereby consumers take out a loan for a fee and are then required to pay the loan back in a short amount of time, usually a couple of weeks.
Southern Bancorp CEO Darrin Williams said the problem arises when these individuals, usually low-income borrowers, are unable to repay the loan in such a short period of time and must then “roll over” the loan with a new fee added, which then starts the cycle over.
“As a CDFI, Southern Bancorp focuses our efforts in rural, low-income communities in which we see the devastating effects of predatory loans,” said Williams. “We support the original rule and encourage the CFPB to reconsider rescinding it so that families in Arkansas, Mississippi, and beyond can access credit responsibly with an eye toward building their financial future as opposed to that of unscrupulous lenders seeking to exploit desperate families.”
Former CFPB Acting Director Mick Mulvaney, now President Donald Trump’s chief of staff, first announced in October the federal agency would issue Notice of Proposed Rulemakings (NPRMs) to reconsider the rule’s mandatory underwriting requirements and to address the rule’s compliance date. Mulvaney, a frequent critic of CFPB regulations under former President Barack Obama, has said there was insufficient evidence and legal support for the mandatory underwriting provisions in the 2017 rule.
CFPB officials now say they are concerned the former provisions would reduce access to credit and competition in states that have determined it is in their residents’ interests to be able to use such products, subject to state-law limitations. The NPRM proposing to rescind the mandatory underwriting requirement is open to public comment for 90 days.
Payday and similar loans are designed to be small, short-term loans lasting two to three weeks, but with high annual interest rates of 300% to 500% or more. A 2014 CFPB report showed as many as 80% of payday loans are extended or rolled over into another loan within two weeks and borrowers often take out multiple loans.
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.
Since that time, most payday loan operators have moved out of 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.
Williams said the recent federal shutdown clearly illustrates how many Americans are only one paycheck away from serious financial difficulty.
“Real solutions to this problem include stronger savings initiatives, greater access to responsible credit, and widespread financial education – along with policies that help, not harm, the chances of families working to lift themselves up,” said Williams, a former Democratic state representative.
The CFPB will soon accept public comments regarding the rule at this link.