Opinion | Trump’s Payback For Payday Lenders
The federal Consumer Financial Protection Bureau betrayed financially vulnerable Americans last week by proposing to gut rules conceived during the Obama era that shield borrowers from predatory loans carrying interest rates of 400 percent or more. The bureau’s proposal is based on a legally dubious rationale that will surely be challenged in federal court. The agency’s abdication of its mandate to protect consumers underscores the need for state usury laws, which have passed in 16 states and offer the surest path to curtailing debt-trap lending.
Payday lenders promote “easy” loans for workers who run short of cash between paychecks and who typically promise to repay the debt within two weeks. But voluminous data collected by the consumer protection bureau showed that the industry’s business model — in which a $500 loan could cost a borrower $75 or more in interest just two weeks later — was built on the presumption that customers would be unable to pay at the appointed time and would be forced to run up the tab by borrowing again.
A 2014 bureau study of 12 million similar loans found that over 60 percent went to borrowers who took out seven or more loans in a row. In fact, a majority of loans went to people who renewed so many times that they ended up paying more in fees than the amount of money they originally borrowed. Among those trapped in this debilitating cycle were many people scrimping by on disability income.
After years of research, the bureau in 2017 issued sensible regulations governing loans that lasted 45 days or fewer. The cornerstone rule required payday lenders to determine whether the borrower could repay the debt while still meeting living expenses. The point was to create a supply of small-dollar loans that allowed lenders to earn a reasonable profit without driving borrowers into penury.
This strategy was clearly working. But the Trump administration established from the start that it was more interested in rewarding the lending industry than protecting borrowers. Mick Mulvaney, as the bureau’s acting director, sided with the lenders last year when they went to court to block the regulations. The bureau’s new director, Kathleen Kraninger, has now proposed hollowing out nearly all of the meaningful requirements in the rules — including the ability-to-pay requirement. The bureau argues that there was “insufficient evidence” for the provision, despite a wealth of data supporting it and the fact that the provision has long been a foundation of sound underwriting.
Consumer organizations are gearing up to flood the bureau with data showing that the existing rules are fully justified and that dismantling them would harm millions of borrowers. If the new rules weather the comment period and become final, a lawsuit will certainly follow. By that point, the 2020 political campaigns will be in full swing, and Republican candidates will have a difficult time ducking the issue.