FILE- In this Aug. 27, 2018, file photo a sign stands at the construction site for the Consumer Financial Protection Bureau's new headquarters in Washington. The nation's federal financial watchdog has announced its plans to roll back most of its consumer protections governing the payday lending industry. It's the Consumer Financial Protection Bureau's first rollback of regulations under its new Director, Kathy Kraninger, who took over the bureau late last year. (AP Photo/Andrew Harnik, File)The nation's federal financial watchdog plans to abolish some of its most 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 percent.
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." That 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.
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 as acting director of the bureau in late 2017, announced a year ago that the bureau was intending to revisit the rules.
Jabo Covert, vice president of government relations for the Cleveland, Tennessee-based Check Into Cash, said the CFPB changed only one section of more than 2,000 pages of regulations for payday lenders.
"As drafted, the original version of the rule would have cut off a vital source of regulated credit to millions of Americans," Covert said Wednesday. "While many of the onerous requirements of the original rule remain in place, this was a reasonable step to help maintain access to credit."
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.