At a time when American consumers need more protection than ever from predatory loans, the Consumer Financial Protection Bureau (CFPB) has issued a final rule on payday loans that rolls back important protections developed during the Obama administration. The 2017 CFPB Payday Rule was set to go into effect last year, but was delayed by the Trump administration.

Under the original rule—blocked by new leadership at the CFPB—payday lenders were required to determine that the borrower could repay the high-interest loan in full within two weeks. These underwriting standards are similar to what banks and other lenders use when deciding whether to approve a long-term loan.

“Our actions today ensure that consumers have access to credit from a competitive marketplace, have the best information to make informed financial decisions, and retain key protections without hindering that access,” CFPB Director Kathy Kraninger said in a statement.

“The CFPB, under Director Kathy Kraninger, just gave predatory payday lenders the green light during a global pandemic and economic crisis,” said Mike Litt, consumer campaign director at U.S. PIRG. “Now that we’re in the middle of an economic crisis, millions of Americans are vulnerable to predatory loans that will make a terrible situation worse.”

Read U.S. PIRG’s detailed report on payday loans.

According to the Consumer Federation of America (CFA), the ability-to-repay standard “is critical to protecting consumers from an endless, destructive debt cycle.”

“The CFPB is empowering predatory lenders at a time when it should be focused on its mission, to protect consumers in the financial marketplace,” said Rachel Weintraub, CFA’s legislative director and general counsel. “Payday loans already disproportionately harm the financially vulnerable. To prioritize the payday loan industry over American consumers and their families during a financial crisis is not only cruel, but a failure to fulfill its mission.”

The Community Financial Services Association of America (CFSA), the trade association that represents payday lenders, said the CFPB’s decision to remove the “ability-to-pay” provisions of the payday loan rule would benefit millions of consumers.

“The CFPB’s action will ensure that essential credit continues to flow to communities and consumers across the country, which is especially important in these unprecedented times,” said D. Lynn DeVault, chairman of the CFSA, in a statement.

DeVault called the ability-to-repay provisions “simply unworkable” and said they imposed unreasonable burdens on consumers and lenders that would have caused loan volume to decrease by 60 to 80 percent.

How Do Payday Loans Work?

Payday loans are typically the most expensive consumer loans, with an annual interest rate that’s between 400 and 600 percent in some states, according to a survey by the Center for Responsible Lending.

About 12 million Americans use a payday loan each year, according to the Community Financial Services Association of America. They’re popular with members of the military.

Payday loans are small (generally less than $500) unsecured, short-term loans (one to four weeks) that are designed to provide fast cash in an emergency. They are typically due in full––loan plus fees––on the borrower’s next pay day.

Unfortunately, many people who use payday loans fall into a cycle of debt that makes the financial situation even worse.

A CFPB study found that a majority of payday loan borrowers cannot pay off the loan when it comes due, so they renew or reborrow that loan at least 10 times, paying significantly more in fees than the credit they received.

Consumer advocates call payday loans “a debt trap” that targets the most financially vulnerable.

“By disproportionately locating storefronts in majority Black and Latino neighborhoods, predatory payday lenders systemically target communities of color, further exacerbating the racial wealth gap,” said Rachel Gittleman, CFA’s financial services outreach manager.

Consumer groups are calling on Congress to undo the damage done by the CFPB and protect consumers from these predatory lenders.

“Rates on high-cost credit should be capped at 36 percent during the remainder of the COVID-19 emergency and its financial aftermath,” CFA’s Weintraub said. “Following a temporary fix, Congress must pass H.R. 5050/S. 2833, the Veterans and Consumers Fair Credit Act, to permanently cap interest rates at 36 percent for all consumers.”

 




Contributing editor Herb Weisbaum (“The ConsumerMan”) is an Emmy award-winning broadcaster and one of America's top consumer experts. He is also the consumer reporter for KOMO radio in Seattle. You can also find him on Facebook, Twitter, and at ConsumerMan.com.