One month into his administration, President Trump already has dramatically altered the future of consumer finance.
When it appeared that former President Barack Obama would transfer power to fellow Democrat Hillary Clinton, major changes loomed for bank customers and for people who rely on alternative services, such as payday loans.
Payday lenders warned that a rule proposed in July by the Consumer Financial Protection Bureau would put them out of business.
Prepaid cards, another payment method increasingly popular among people without a traditional bank account, were the target of another rule proposed in October by the bureau, raising concerns among issuers.
The bureau in May proposed banning “forced arbitration” clauses in financial firm contracts, which prevent customers from filing class-action lawsuits. That proposed rule was a priority for consumer advocates but hated by the industry.
If those rules were put in place, the consumer financial system would have looked much different and much more regulated.
Now the regulations are at risk. To a lesser extent, so are all the other major initiatives of the consumer bureau, such as regulation of mortgages. Six years into its operations, the bureau for the first time doesn’t have Obama to protect it. Republicans in top positions, such as House Financial Services Committee Chairman Jeb Hensarling, have stated their intentions to significantly limit the bureau’s powers or do away with it altogether.
Bureau watchers also are watching closely to see if Trump tries to fire the Obama-appointed director of the powerful agency, Richard Cordray, and replace him with an appointee more opposed to aggressive regulation.
None of that, however, needs to happen for the GOP-led government to forestall the planned rules from taking effect. That is a fait accompli, thanks to a little-used legislative tool wielded by Republicans.
That tool is the Congressional Review Act, a law rarely used before this month that allows Congress to block a rule from going into effect by merely passing a resolution with simple majorities in the House and Senate, without a filibuster.
Republican Rep. Roger Williams, a Texan on the Financial Services Committee, last week introduced a Congressional Review Act resolution to disapprove of the prepaid card rule.
The bureau, he said on introducing the resolution, has “cornered millions of Americans who have limited or no access to the products offered by our traditional banking system.”
If successful, the resolution would stop the rule from going into effect in October. The rule would mandate that prepaid cards offer loss limits for customers with lost or stolen cards, and required that issuers investigate and resolve payment errors.
The fate of that particular rule is not necessarily of overwhelming interest to the industry, said Alan Kaplinsky, head of the Consumer Financial Services Group at the law firm Ballard Spahr, who counsels banks on regulatory matters.
But the threat of the Congressional Review Act disapproval is. If a rule is struck down by such a resolution, the agency is prevented from proposing a similar rule in the future.
“It’s sort of a scorched-earth approach,” said Nick Bourke, the director of consumer finance at Pew Charitable Trusts. Using the act to undo consumer protections, he said, is “revolutionary and potentially very harmful.”
Finalizing a rule and then having it undone by the Congressional Review Act, from the perspective of the rule’s advocates, is worse than never finalizing it in the first place. For that reason, the bureau’s proposals for regulating payday lending and forced arbitration clauses may never see the light of day.
“There’s a little game of chicken going on right now” between advocates who wanted to see the rules finalized and those fearful of the GOP Congress striking them down, Kaplinsky said.
As a result, one possibility is that the rules remain in limbo, neither retracted nor finalized, until Cordray’s term expires in 2018 or the bureau is overhauled through Republican-led reforms.
The payday lending rule wasn’t necessarily close to being finalized, even if Clinton had won. The sweeping set of regulations would have implemented guardrails meant to prevent borrowers from being trapped in a series of high-cost loans that they would struggle to repay.
Now, however, its prospects are grim. “I can’t imagine that that rule is ever going to see the light of day,” Kaplinsky said.
Unlike other regulators of independent agencies, Cordray did not step down when Obama left office and has not indicated any plans to do so.
Meanwhile, Republicans are setting high stakes for the bureau: Last week, Sen. Ted Cruz, R-Texas, introduced legislation to straight-up abolish the agency.
