The New York Times, March 26, 2015
BIRMINGHAM, Ala. — The Consumer Financial Protection Bureau, the agency created at President Obama’s urging in the aftermath of the financial crisis, took its most aggressive step yet on behalf of consumers on Thursday, proposing regulations to rein in short-term payday loans that often have interest rates of 400 percent or more.
The rules would cover a wide section of the $46 billion payday loan market that serves the working poor, many of whom have no savings and little access to traditional bank loans. The regulations would not ban high-interest, short-term loans, which are often used to cover basic expenses, but would require lenders to make sure that borrowers have the means to repay them.
The payday loan initiative — whose outlines were the focus of a front-page article in The New York Times last month — is an important step for a consumer agency still trying to find its footing among other financial regulators while defending itself against fierce attacks from Republicans in Washington.
On Thursday, Mr. Obama lent his weight to the consumer bureau’s proposal, saying that it would sharply reduce the number of unaffordable loans that lenders can make each year to Americans desperate for cash.
“If you lend out money, you have to first make sure that the borrower can afford to pay it back,” Mr. Obama said in remarks to college students here. “We don’t mind seeing folks make a profit. But if you’re making that profit by trapping hard-working Americans into a vicious cycle of debt, then you got to find a new business model, you need to find a new way of doing business.”
The president’s appearance at Lawson State Community College is part of a campaign-style effort to portray Republicans as out of touch with the needs of middle-class Americans. In his remarks, he accused Republicans of backing a federal budget that would benefit the wealthy at the expense of everyone else. And he denounced his adversaries in Congress for seeking to terminate the consumer agency’s automatic funding.
“This is just one more way America’s new consumer watchdog is making sure more of your paycheck stays in your pocket,” the president said. “It’s one more reason it makes no sense that the Republican budget would make it harder for the C.F.P.B. to do its job.” He vowed to veto any attempt that “unravels Wall Street reform.”
Yet even supporters of the consumer bureau’s mission were critical on Thursday, saying that the proposed payday lending rules do not go far enough.
A chorus of consumer groups said that loopholes in the proposal could still leave millions of Americans vulnerable to the expensive loans. Lenders have already shown an ability to work around similar state regulations, they said.
“We are concerned that payday lenders will exploit a loophole in the rule that lets lenders make six unaffordable loans a year to borrowers,” said Michael D. Calhoun, the president of the Center for Responsible Lending.
Payday lenders say that they welcome sensible regulation, but that any rules should preserve credit, not choke it off. “Consumers thrive when they have more choices, not fewer, and any new regulations must keep this in mind,” said Dennis Shaul, the chief executive of the Community Financial Services Association of America, an industry trade group.
The attacks from both directions underscore the challenges facing the bureau, and its director, Richard Cordray, as it works to fulfill its mandate while pressure grows from Congress and financial industry groups.
In drafting the rules, the bureau, according to interviews with people briefed on the matter, had to strike a precarious balance, figuring out how to eliminate the most predatory forms of the loans, without choking off the credit entirely.
The effort to find that balance can be seen in the choice that lenders have in meeting underwriting requirements under the proposal.
Under one option, lenders would be required to assess a customer’s income, other financial obligations and borrowing history to ensure that when the loan comes due, there will be enough money to cover it. The rules would affect certain loans backed by car titles and some installment loans that stretch longer than 45 days.
Or the lender could forgo that scrutiny and instead have safety limits on the loan products. Lenders could not offer a loan greater than $500, for example.
Under this option, lenders would also be prohibited from rolling over loans more than two times during a 12-month period. Before making a second or third consecutive loan, the rules outline, the lenders would have to provide an affordable way to get out of the debt.
For certain longer-term loans — credit that is extended for more than 45 days — the lenders would have to put a ceiling on rates at 28 percent, or structure the loans so that monthly payments do not go beyond 5 percent of borrowers’ pretax income.
Driving the proposal was an analysis of 15 million payday loans by the consumer bureau that found that few people who have tapped short-term loans can repay them. Borrowers took out a median of 10 loans during a 12-month span, the bureau said. More than 80 percent of loans were rolled over or renewed within a two-week period.
Nearly 70 percent of borrowers use the loans, tied to their next paycheck, to pay for basic expenses, not one-time emergencies — as some within the payday lending industry have claimed.
Such precarious financial footing helps explain how one loan can prove so difficult to repay. Borrowers who take out 11 or more loans, the bureau found, account for roughly 75 percent of the fees generated.
Until now, payday lending has largely been regulated by the states. The Consumer Financial Protection Bureau’s foray into the regulation has incited concerns among consumer advocates and some state regulators who fear that payday lenders will seize on the federal rules to water down tougher state restrictions. Fifteen states including New York, where the loans are capped at 16 percent, effectively ban the loans.
The rules, which will be presented to a review panel of small businesses, are likely to set off a fresh round of lobbying from the industry, said Senator Jeff Merkley, Democrat of Oregon.
“They should instead strengthen this proposal by absolutely ensuring it is free of loopholes that would allow these predatory loans to keep trapping American families in a vortex of debt,” he said.
Mr. Cordray introduced the rules at a hearing in Richmond, Va., on Thursday, flanked by the state’s attorney general and consumer groups from across the country. At the start of the hearing, Virginia’s attorney general, Mark Herring, said the choice of location was apt, describing the state as “the predatory lending capital of the East Coast,” a description he said was shameful.
The hearing offered a rare glimpse at the forces aligning on either side of the payday loan debate. On one side, there was an array of people against the rules, from industry groups to happy customers, to dozens of payday loan store employees — many wearing yellow stickers that read, “Equal Access, Credit For All.”
On the other, there were consumer groups, housing counselors, bankruptcy lawyers and individual borrowers, all of them calling for a real crackdown on the high-cost products.
Both sides had their horror stories. Some told of stores forced to close, while others described how such loans had caused tremendous pain and fees.
At one point, a woman wearing a neon pink hat who gave only the name Shirley burst into tears, saying that without the loans, her cousin with cancer would be dead.
Martin Wegbreit, a legal aid lawyer in Virginia, called payday loans “toxic,” noting that “they are the leading cause of bankruptcy right behind medical and credit card debt.”