The Federal Office for Financial Consumer Protection Betrayed Americans Financially Vulnerable Last week by proposing to void the rules designed in the Obama era that protect borrowers from predatory loans involving interest rate of 400 percent or more. The office’s proposal is based on a legally dubious logic that will surely be called into question in federal court. Abdication by the agency of its consumer protection mandate stresses the need for state usury laws, which have adopted in 16 states and offer the safest way to reduce loan debt traps.
Payday lenders promote “easy” loans for workers who run out of money between paychecks and usually promise to pay off the debt within two weeks. But the massive data collected by the Consumer Protection Bureau showed that the industry business model – in which a loan of $ 500 could cost a borrower $ 75 or more in interest two weeks later – was based on the assumption that customers would not be able to pay at the agreed time and would be forced to foot the bill by borrowing again.
A 2014 office to study of 12 million similar loans found that over 60 percent went to borrowers who released seven or several loans in a row. In fact, the majority of the loans went to people who renewed so many times that they ended up paying more in costs than the amount of money they originally borrowed. Among those trapped in this debilitating cycle were many who were skimping on disability income.
After years of research, the office of 2017 published sensible regulations governing loans of 45 days or less. The basic rule required payday lenders to determine whether the borrower could repay the debt while still meeting living expenses. The idea was to create a supply of low-value loans that allowed lenders to make a reasonable profit without causing borrower shortage.
This strategy clearly worked. But the Trump administration established from the start that it was more interested in rewarding the credit industry than protecting borrowers. Mick Mulvaney, as interim director of the office, on the side of lenders last year when they went to court to block the settlements. The new director of the office, Kathleen kraninger, has now proposed to remove almost all significant requirements from the rules, including the ability to pay requirement. The office argues that there was “insufficient evidence” for the disposition, despite a mine of data supporting it and the fact that the layout has long been the foundation of a good underwriting.
Consumer organizations are preparing to flood the bureau with data showing that the existing rules are fully justified and that their dismantling would harm millions of borrowers. If the new rules stand up to the comment period and become final, a trial will certainly follow. At this point, the 2020 political campaigns are in full swing and Republican candidates will find it difficult to dodge the issue.