Payday lenders, unleashed
OObama administration’s signature consumer-protection actions was to write a long-awaited, badly needed set of rules for payday loans that the Consumer Financial Protection Bureau issued in November 2017. So it was hardly surprising Wednesday when the Trump administration, which has devoted so much effort to erasing its predecessor’s accomplishments, came to the rescue of the payday lenders that monetize the desperation of financially strapped Americans.
It’s a reprehensible move. And in laying out its reasons for easing up on payday lenders, the administration signaled its unwillingness to regulate predatory lending in general.
Payday lenders offer relatively small short-term loans to anyone with a paycheck and a bank account, regardless of his or her financial health. It’s precious close to noquestions-asked lending. The catch is the loans have to be repaid in full within two to four weeks, and the fees charged — often $15 per $100 borrowed — are the financial equivalent of a triple-digit annual interest rate. About 15 states have usury laws that block payday lending; the rest cap such loans at $300 (as in California) to $1,000.
These loans are so costly for consumers, no one with access to a Visa card or a home equity line of credit would ever dream of taking one out. That’s why the loans are considered a last-resort form of borrowing for people with few assets or bad credit — in other words, for the financially desperate.
Yet borrowers who live paycheck to paycheck often have no ability to repay a payday loan on time, so they end up digging themselves into deeper holes. In developing its 2017 rules, the Consumer Financial Protection Bureau found that the payday loan industry made most of its profits off of debttrapped borrowers who, after taking out one loan, took out half a dozen or more in quick succession just to get back above water. Consumers who borrowed seven or more times in a year accounted for 90% of the fees the industry collected, the bureau reported in 2017, and those who borrowed 10 or more times accounted for 75% of the fees.
That’s why the bureau’s 2017 rules barred payday lenders from making a loan unless they determined the borrower could repay it, just as banks and mortgage lenders must do with their larger loans. The rules carved out an exception for loans of less than $500, but only if borrowers were allowed to repay the amount in stages over about three months. Finally, they limited the number of payday loans that a person could take out in quick succession, while cracking down on lenders’ efforts to collect payments from borrowers’ depleted bank accounts.
Not long after President Trump named a new leader at the bureau — first his thenbudget director, Mick Mulvaney, and then a former Mulvaney aide, Kathy Kraninger — it started attacking the 2017 rules. That process culminated Wednesday in a proposal to lift the requirement that payday lenders check a borrower’s ability to repay and allow them to make as many loans to individual borrowers as state law permits.
The new bureau argues that the 2017 rules were based on too little evidence, which strains credulity given the record the old bureau amassed over the nearly six years it spent developing them. The current bureau also contends that its predecessor misread the standards Congress set for finding a lending practice to be unfair or abusive. But its reading of the law is so crimped, it would be hard to find any practice unfair of abusive, no matter how predatory. That’s because it would put the onus on consumers to understand the risks and protect themselves from the debt traps that lenders set for them.
This is the Nanny State in reverse, where government seems more concerned about business’ ability to offer a product than about the product’s effect on the people who use it. Tellingly, the 2017 rules were projected to reduce the number of payday loans by up to 68% even though the number of borrowers would remain high, because the rules would crack down on repeat borrowing. In other words, they would prevent debt traps.
The Trump administration contends that it’s trying to preserve a valuable form of credit. It is not. Rather than trying to extend reasonable forms of credit to those who need it, the administration is going to bat for a business model that takes unfair and abusive advantage of people with too few good options.