Federal payday lending rule could face repeal amid new battle

January 17, 2018

Consumer advocates and business groups are battling anew over the possibility the Trump administration will eliminate a rule enacted to ensure that borrowers who take out high-interest loans between paychecks can pay them back.  

Clashing with support for a repeal by business groups, the policy arm of product tester Consumer Reports and other organizations say the so-called payday lending rule finalized last year by the U.S. Consumer Financial Protection Bureau should be fully implemented as soon as possible.

The regulation "targets the most abusive short-term lending practices" while "paving the way for more responsible lenders to emerge with safer alternatives," Suzanne Martindale, senior attorney for Consumers Union, said in a statement.

However, Dennis Shaul, CEO of the payday loan industry group called the Community Financial Services Association of America, said the consumer bureau rule was "crafted on a pre-determined, partisan agenda that failed to demonstrate consumer harm from small-dollar loans."

The escalating debate comes as the federal watchdog, whose leadership shifted from an Obama administration appointee to a Trump administration pick late last year, said Tuesday that it would take a new look at the rule.

The watchdog, created under the Dodd-Frank safeguards approved after the financial crisis, said in a statement that it "intends to engage in a rulemaking process so that the bureau may reconsider the payday rule."

Although most of the rule's provisions don't take effect until August 19, 2019, the new rulemaking opens the door for a process that could revise or repeal the safeguards.

Separately, proposed congressional action could nullify the payday loan rule without any action by the consumer bureau. Mick Mulvaney, the Trump White House budget director tapped to head the federal watchdog on an interim basis, has said he supports that action.

The repeal debate focuses on a 2017 rule that would require payday lenders to determine, before granting a loan, whether a borrower could afford to make full repayment with interest within 30 days. The loans are often due within two weeks and include annual interest rates of roughly 390%, according to a 2014 report by the consumer bureau.

The report, produced when the federal watchdog was headed by Obama appointee Richard Cordray, found that roughly 62% of all payday loans go to consumers who repeatedly extend repayments. Some end up owing more in fees than the amount they initially borrowed the report said.

However, critics of the payday lending rule argue it would victimize the working poor who can't pay for urgent financial expenses, such as a medical emergency.

In a report issued Wednesday, the libertarian Competitive Enterprise Institute cited a story about a single mother from Oakland, Cal. who took out a small-dollar loan to pay for an urgent car repair. Without that money, she likely faced a choice between losing her job or losing her apartment, the report said.

"Taking out such a high-cost loan may not be ideal, but many consumers have no better options," the CEI report said.

The Consumer Bankers Association, a trade group focused on retail banking, added a call for the consumer bureau to examine the use of bank-offered small-dollar lending.

In contrast, Allied Progress, a consumer group backed in part by the New Venture Fund, a public charity focused on conservation, education and other issues,  argued that Mulvaney is biased against the payday lending rule because he "took thousands of dollars from the payday industry" in the form of campaign contributions when he served as a Republican U.S. House member from South Carolina.

Mulvaney said in December the contributions posed no conflict of interest with his interim leadership of the consumer bureau.