Financial watchdog to gut most of its payday lending rules

NEW YORK — The nation’s federal financial watchdog said Wednesday that it plans to abolish most of its critical consumer protections governing payday lenders.

The move is a major win for the payday lending industry, which argued the government’s regulations could kill off a large chunk of its business. It’s also a big loss for consumer groups, who say payday lenders exploit the poor and disadvantaged with loans that have annual interest rates as much as 400 per cent.

The cornerstone of the regulations was a requirement that lenders make sure borrowers could afford to repay a payday loan without being stuck in a cycle of debt, a standard known as “ability to repay.” This standard would be eliminated under the new rules. Another part of the rules, which would have limited the number of payday loans a person could roll over, was also eliminated.

Critics of the payday lending industry have argued that without these underwriting standards, the CFPB’s new regulations are effectively toothless. The main criticism of the payday lending industry was that many borrowers would take months to repay a loan that was originally designed only to last a couple of weeks, renewing the loan over and over again.

“This proposal is not a tweak to the existing rule … it’s a complete dismantling of the consumer protections (the bureau) finalized in 2017,” said Alex Horowitz, a researcher with Pew Charitable Trusts, a think-tank whose research on the industry was relied on heavily by the bureau when the original rules were unveiled a year and a half ago.

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The announcement was the first abolition of regulations under the Consumer Financial Protection Bureau’s new director, Kathy Kraninger, who took over the bureau late last year. Mick Mulvaney, who was appointed by President Donald Trump’s as acting director of the bureau in late 2017, announced a year ago that the bureau was intending to revisit the rules. As a Congressman from South Carolina, Mulvaney received tens of thousands of dollars in political donations from the payday lending industry, raising concerns he was too connected to the industry to appropriately regulate it.

The Community Financial Services Association of America, a payday lending group, is holding its annual conference in March at Trump’s Doral golf club in Miami. It held its conference there last year, too. Government watchdog groups have criticized the use of Trump hotels and resorts by businesses and lobbying groups as legal bribery, a way to influence regulation and policy by giving money to the president.

The CFSA did not respond to an Associated Press request for comment on that criticism, but sent a statement saying it was “disappointed” with certain regulations left intact and that its members were looking forward to returning to the Doral this year.

“The venue is popular with our members and it meets our needs,” said CSFA CEO Dennis Shaul.

Under the Obama administration, the CFPB spent close to five years working on a process to finally nationalize the regulation of the payday lending industry, which is mostly regulated at the state level. The bureau started the process back in 2012 and its finalized rules were finished in late 2017. It was the last major pieces of regulation done under Richard Cordray, the bureau’s first permanent director, before he left the bureau.

“I think this is a bad development for consumers,” Cordray said. “We looked carefully at this industry and there was a common problem of borrowers getting trapped in long-term debt. We had put together what I considered to be a modest proposal. The change is really disappointing and hasty.”

CFPB did propose keeping one part of the payday lending regulations: a ban on the industry from making multiple debits on a borrower’s bank account, which consumer advocates argued caused borrowers hardship through overdraft fees. In a statement, the CFSA felt the CFPB’s repeal did not go far enough, and would have wanted the regulations over debits eliminated as well.

The proposed new rules are subject to a 90-day comment period by the public. The proposed changes are almost certain to face legal challenges, since the bureau is taking a radical departure from its previous position, which is not something federal regulators are typically allowed to do under law.

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AP Business Writer Bernard Condon contributed to this report from New York.

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Ken Sweet covers banks and the Consumer Financial Protection Bureau for The Associated Press. Follow him on Twitter at @kensweet.

Ken Sweet, The Associated Press