The Consumer Financial Protection Bureau finalized a sweeping set of rules on payday and auto title loans Thursday, defying Republican opposition and setting up another test of the financial industry's clout in Congress.
The agency, led by the Obama-appointed Director Richard Cordray, announced a final rule that would require lenders who offer short-term, small-dollar loans verify that customers have the ability to repay the loans. Specifically, they would have to ensure that borrowers will be able to pay for living expenses and meet major financial obligations.
The bureau does not have the authority to cap interest rates on payday loans, which can feature annualized rates over 300 percent, although many states have done so. Instead, the bureau's rule includes several provisions meant to prevent borrowers from falling into "debt traps," or the situation in which they must take out multiple loans to pay off the cost of previous borrowing.
"The CFPB's new rule puts a stop to the payday debt traps that have plagued communities across the country," Cordray said. "Too often, borrowers who need quick cash end up trapped in loans they can't afford. The rule's common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail."
The finalized rule drops provisions affecting longer-term loans from the version it proposed a year ago and also contained other refinements to the ability-to-repay test. It would become effective in 21 months.
Also included were bigger exemptions for small, short-term loans offered by banks and credit unions, a feature sought by some experts who would prefer to see those institutions take business away from payday lenders.
"The final rule is a major improvement over the 2016 proposal because it opens the door to lower-cost installment loans from banks and credit unions," said Nick Bourke, director of the Pew Charitable Trusts' consumer finance project. Credit union groups said Thursday they were reviewing the rule.
Shortly after the bureau released its rule, the Office of the Comptroller of the Currency, charged with regulating national banks, withdrew 2013 guidance it had provided to banks regarding small-dollar rules. Keith Noreika, the acting comptroller appointed by President Trump, said he rescinded the guidance to prevent a conflict with the new CFPB rule and to encourage more such loans from banks and credit unions. Preventing those loans "may even hurt the very consumers it is intended to help, the most marginalized, unbanked and underbanked portions of our society," he said.
Thursday's announcement marks a major turnaround in the perceived fortunes of the payday loan rule. With the election of President Trump in November, some in the financial industry thought the regulation might be fended off. Republicans, now in unified control of the government, have opposed the rule and the underlying 2010 Dodd-Frank financial reform law that created the board and authorized it to regulate the payday industry.
The industry has contended that their customers need loans on an emergency basis. Overly burdening their business, they have warned, will drive consumers to worse alternatives.
"Taking away their access to this line of credit means many moreAmericans will be left with no choice but to turn to the unregulated loan industry, overseas andelsewhere, while others will simply bounce checks and suffer under the burden of greater debt," said Edward D'Alessio, head of the Financial Service Centers of America, a trade group.
A CFPB official told reporters Thursday that the rules would prohibit about two-thirds of loans currently made by payday lenders. Nevertheless, Cordray insisted, "most people will be able to get the credit they need" by borrowing from lenders who meet the new requirements.
Now, the question is whether Republicans would be able to cancel the rule via the Congressional Review Act, which allows for undoing new regulations with only a simple majority in the Senate, bypassing the filibuster.
Republicans have used the tool to undo regulations the Obama administration issued late in its tenure. "We've done 14-in-law this year alone, because they can't filibuster that," House Speaker Paul Ryan boasted last week in an interview on Fox News.
Yet payday critics question whether Republicans can muster majorities to vote against the payday rule.
Republicans in the Senate have yet find the votes to cancel another major rule the bureau finalized this summer, namely a measure stopping financial companies from inserting clauses into contracts that prevent consumers from joining in class-action lawsuits and instead direct them into private arbitration to settle disputes.
Consumer and liberal advocacy groups that favor the payday rule view it as even more likely to survive a Congressional Review Act challenge, given that it affects a narrower slice of the financial industry and that voters generally appear to favor stricter guardrails on payday lending.
Ohio Sen. Sherrod Brown, the top Democrat on the Senate Banking Committee, praised Thursday's rule release, saying that "payday lenders have exploited loophole after loophole to trap working people in debt, and this rule will help put an end to their abusive practices."
Allied Progress, a liberal advocacy group, said it would work to defend the rule from a CRA challenge. "We owe it to hard-working men and women everywhere to remain vigilant and fight any effort to repeal this rule. We simply cannot allow the debt trap to continue," said the group's executive director, Karl Frisch.
In recent months, the congressional GOP has intensified its long-running feud with Cordray.
Cordray's term runs into next summer. Republicans have sought to portray his move to finalize rules now as politically motivated, charging that he is preparing to leave office to run for governor in Ohio as a Democrat. Cordray has not indicated his intentions and ended Thursday's call with reporters before he could be asked about them.
Dennis Shaul, head of the Community Financial Services Association of America, suggested that the questions about Cordray's political intentions "have created a cloud of suspicion over this rule." His comments also raised several other issues with the process involved in the rule, including the handling of hundreds of thousands of comments from the public, that could be the basis of an industry lawsuit against the bureau.
Center for Responsible Lending director Mike Calhoun told reporters Thursday that he expected lawsuits and legislative challenges to the rule, and that "we are optimistic that these attacks will be rebuffed."
Nor would it be simple for a Trump-appointed successor to Cordray, whose term expires next summer, to stop the rule before it goes into effect in 2019, said Lisa Donner, the executive director of Americans for Financial Reform, a group that has backed the rulemaking.
Thanks to federal laws setting the regulatory process, she explained, the new rule "can't be wished away with the wave of a wand."