Payday lenders fear that their industry, or broad swaths of it, could be outlawed by new rules expected from the Consumer Financial Protection Bureau on Thursday. Advocates of the regulations, one of the major administrative efforts of President Obama’s last year, see that as the long-awaited outcome of a process years in the making.
The industry anticipates that the proposed rules that will be announced at a field hearing in Kansas City, Mo., will not be significantly different from the guidelines that bureau Director Richard Cordray laid out at an event in Richmond in March, guidelines they saw as an existential threat to their businesses.
They would “largely eliminate the small-dollar short-term lending industry,” said Jamie Fulmer, a representative for Advance America, one of the country’s largest payday lenders.
Lenders pointed to analyses from third-party consultants as well as from the bureau itself estimating that the earlier versions of the rules could decrease payday loan volumes by two-thirds or more.
“There is an expectation that they mean to take out a substantial part of the industry as we have known it,” said Dennis Shaul, head of the Community Financial Services Association of America, the trade group for payday lenders.
The rule’s advocates, however, see potential upside in that possibility.
They favor eliminating “debt traps,” the situations in which borrowers facing an emergency take out a payday loan and then take out a series of further expensive loans to pay off earlier balances, falling further behind as they go.
Bureau officials have been weighing several alternatives for eliminating those traps, either by requiring that businesses verify borrowers’ ability to repay the loans, stopping borrowers from taking out long strings of loans, capping interest rates, or limiting loan payments as a share of income.
If lenders can’t work within those constraints, they don’t deserve to stay in business, some advocates suggest.
“If payday lenders are saying the only way they can do business is to charge 300 percent or 1,000 percent interest to borrowers, then maybe they need to find a new model,” said Ruth Susswein, a director at the consumer group Consumer Action.
Instead of the payday lenders they see as predators, the rule’s advocates hope, new businesses will step into the market shaped by the new regulations, including banks and credit unions.
“Payday loans are here to stay no matter what the CFPB does,” said Nick Bourke, director of the smaller dollar loan program at Pew Charitable Trusts. He noted that businesses already are making loans that comply with the bureau’s rules in at least 25 states.
The question is whether the rules will be clear and specific enough to draw banks and credit unions into the market for small-dollar loans, Bourke said. To that end, he said he would be looking to the rule for whether it included an option for loans that limit payments to 5 percent of borrowers’ income and give them up to six months to pay off the loan, a framework he believes could pull banks into the market.
President Obama and Democrats included the bureau in the 2010 Dodd-Frank financial reform law partly to provide consumer protections to the 15 million-plus generally financially stressed customers who use payday services.
The rule’s introduction “shows that Dodd-Frank is meeting its goal of providing consumer protection to all Americans, not only the wealthiest,” said Aaron Klein, a scholar at the Brookings Institution who worked in the Obama Treasury Department.
Predatory loans, Klein said, are ones with which the lender stands to make a profit regardless of whether the borrower is able to repay. For that reason, he favors an ability-to-repay standard for lenders, in which they must check the consumer’s ability to manage the loan, rather than a debt-to-income ratio cap.
While the industry has acknowledged the problem with debt traps and bad actors, however, they have pushed back against the ability-to-repay standards or debt-to-income ratio floated by the bureau.
Shaul argued that the rulemaking has been disconnected from a discussion of the needs of customers and instead is part of an ideological effort by payday critics.
Announcing the rules at what he called a “pep rally” in Kansas City would be the “final measure of contempt against the customers.”
Fulmer predicted that the rules would have the effect of pushing customers into “unregulated and sometimes illegal sources of credit,” and higher-cost forms of obtaining cash quickly, especially overdrafts and bounced checks.
The industry is already looking toward the 90-day comment period likely to follow the introduction of the rule next week and preparing for legal and legislative responses, Shaul said.
Lawmakers on both sides of the aisle have already indicated their skepticism of the rule and have introduced legislation that would hold up the bureau’s rulemaking for two years, giving states the ability to write their own rules that would take the place of the federal government’s version.
In turn, payday critics have mobilized against that legislation, with civil rights groups, for example, running campaigns against Debbie Wasserman Schultz, the Florida Democratic congresswoman and head of the Democratic National Committee, for backing the bill.
Some of the same civil rights groups built momentum for the rulemaking by coordinating with Google to ban advertising for payday products through the search engine.
Apart from the lobbying and maneuvering on both sides, Klein said he would be looking for a “rule that allows credit to continue to be provided on reasonable terms to people who need it while at the same time ending predatory loans that are profiting off insolvent borrowers… If you can eliminate one group and incentivize responsible lending to the other, you’ve threaded the needle.”
