One of the Obama administration’s flagship consumer protection actions was to draft a long-awaited and much-needed set of payday lending rules that the Consumer Financial Protection Bureau Posted in November 2017. So it was no surprise that the Trump administration, which devoted so much effort to erasing the accomplishments of its predecessor, came to the rescue of payday lenders who monetize the desperation of short-lived Americans. ‘money.
It is a reprehensible act. And in setting out its reasons for easing payday lenders, the administration signaled its reluctance to regulate predatory lending in general.
Payday lenders offer relatively small, short-term loans to anyone with a paycheck and bank account, regardless of their financial health. This is valuable near no questions asked loans. The catch is that the loans have to be repaid in full within two to four weeks, and the fees charged – most often $ 15 per $ 100 borrowed – are the financial equivalent of an annual interest rate. three-digit. About 15 states have usury laws that block payday loans; the rest caps those loans at $ 300 (like in California) to $ 1,000.
In setting out its reasons for easing payday lenders, the administration signaled its reluctance to regulate predatory lending in general.
These loans are so costly to consumers that no one with access to a Visa card or a home equity line of credit would ever think of getting one. This is why loans are considered a form of borrowing of last resort for people with few assets or bad credit – in other words, for people who are financially desperate.
Yet borrowers who live paycheck to paycheck often don’t have the ability to pay off a payday loan on time, so they end up digging deeper holes for themselves. In developing its 2017 rules, the Consumer Financial Protection Bureau found that the payday loan industry derives most of its profits from borrowers trapped in debt who, after taking out a loan, took out half a dozen or more. in quick succession just to recover. above water. Consumers who borrowed seven or more times per year accounted for 90% of the fees collected by the industry, the office reported in 2017, and those who borrowed 10 or more times accounted for 75% of the fees.
This is why the 2017 bureau rules prohibited payday lenders from granting a loan unless they determined that the borrower could repay it, just as banks and mortgage lenders must do with their. larger loans. The rules provided an exception for loans under $ 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 a person could take out quickly, while suppressing efforts by lenders to collect payments from borrowers’ exhausted bank accounts.
Shortly after President Trump appointed a new chief to the office – first his then budget manager Mick Mulvaney, then a former Mulvaney aide Kathy Kraninger – he began to attack the 2017 rules. This process culminated on Wednesday in a proposal lift the requirement that payday lenders verify a borrower’s repayment capacity and allow them to make as many loans to individual borrowers as state law allows.
The new office argues that the 2017 rules were based on too little evidence, which puts a strain on gullibility given the record the old office has racked up in the nearly six years it spent at develop them. The current office also maintains that its predecessor misinterpreted the standards set by Congress to conclude that a lending practice is unfair or abusive. But his reading of the law is so distorted that it would be difficult to find an unfair or abusive practice, no matter how predatory. This is because it would be up to consumers to understand the risks and protect themselves from the debt traps that lenders set for them.
It’s the Nanny State in reverse, where the government seems more concerned with the ability of companies to deliver a product than the effect of the product on the people who use it. Tellingly, the 2017 rules were to reduce the number of payday loans by up to 68% even though the number of borrowers would remain high, as the rules would clamp down on repeat borrowing. In other words, they would prevent debt traps.
The Trump administration maintains that it is trying to preserve a valuable form of credit. It’s not. Rather than trying to extend reasonable forms of credit to those in need, the administration will fight for a business model that unfairly and abusively benefits people with too few good options.