New leadership at the Consumer Financial Protection Bureau is reversing course on the payday lending rule passed in October under the previous Democratic leadership, the regulator announced Tuesday.
The CFPB, led by Interim Director Mick Mulvaney, plans to reopen the rule for a comment and rulemaking process that is expected to bring more deregulation to auto title lending. Tuesday, was the start of the rule’s “effective date,” but many of the compliance procedures do not take effect until August 2019. The bureau has also signaled it’s willing to waive or delay several application deadlines along the way.
While the rule does not impact traditional retail auto financing directly, it was a signal that the CFPB was moving toward greater scrutiny of all lenders and how they assess a borrower’s ability to repay the loan, John Redding, partner at Buckley Sandler LLP, told Auto Finance News at the time of the rules passage.
The regulation entitled “Payday, Vehicle Title, and Certain High-Cost Installment Loans,” is limited to short-term loans of 45 days or less. It caps the number of times these short-term loans can be made to the same borrower, and lenders are required to show that customers have the ability to repay.
It’s unclear what the bureau plans to change about the rule or if it intends to repeal it altogether because the appropriate paperwork has not yet been filed. The process could take years to unwind as the CFPB would have to conduct research to show the current rules are not working, put out notices for repealing the rules, and consider public and industry comments, among other steps, according to The Associated Press. By comparison, the bureau under the previous leadership started building a case for its current payday lending regulations back in 2012.
The CFPB’s study found title lenders have an incentive to sign up consumers who can’t repay, thus trapping them in a cycle of debt repayment. Because it is actually more profitable for the lender when a consumer is unable to pay, many financial institutions in the space ran no checks on the consumer’s ability to repay.
“The example of the consumer who takes out one payday loan for an emergency and then pays it right back is a misleading exception to the norm,” Richard Cordray, former director of the CFPB, wrote in prepared remarks. “Most of these loans go instead to people who are re-borrowing the same loan many times.”
However, others in the industry feel this last-resort financing product is better than alternatives such as overdrawing a bank account or defaulting on other loans the consumer might have. Mulvaney agrees with those arguments, and received $31,700 in contributions from the payday lending industry during his latest Congressional reelection campaign, according to the Center for Responsive Politics.Like This Post