CFPB Initial Rule On Payday Lending Industry Could Be Revised But Not In Consumers’ Favor

23 December 18

payday loan industry

The Consumer Financial Protection Bureau has done a world of good in the last seven years. One of the more prominent accolades is its issuance of the first federal rule that would curtail the predatory practices of payday loan lenders. The rule also encourages traditional banks to provide more suitable alternatives to consumers.


While it makes some sense to pay $60 on a $500 loan for two weeks to fix a vehicle, payday loans are a financial trap and can do more harm than good. People are often unable to repay a loan and have to continuously borrow money to pay off the first loan, usually with more fees and higher interest rates. With this kind of behavior, the more susceptible Americans are caught in this payday loan lending trap.


The CFPB was able to thwart the abusers and still make emergency credit available to those who needed it most. The lenders were given two options – verify a person’s ability to pay back the loan or let them return the money over time. The rule applied mainly to the loans that were to be paid back in 45 days. With the move, banks could offer longer-term loans that were less expensive for consumers.


The rule, which was slated to begin August 2019, has already affected the industry. For instance, U.S. Bank began offering short-term loans for small amounts to its own checking account consumers. If a person took out a $400 loan, the interest they would pay is $48 compared to the $360 the payday loan industry would demand back.


The payday loan industry was not happy with the ruling. And, two industry groups filed a lawsuit in April to annul the rule, claiming it was arbitrary and did not seek outside opinion on the matter. This, in spite of the agency’s revision of the first rule and giving lenders up to two years to be in compliance.


Payday lenders discovered they had an ally in Mick Mulvaney who became the agency’s director. It wasn’t long after he took control that the agency said it would look over the rule. In October, the agency said it would put attention on the ability-to-pay requirements when it offered its changes to the rule. If it does, the efforts the CFPB have made could be weakened, which would keep people stuck paying high fees and in financial crisis.


Hopefully, Democrats control over the House may stop this from happening but getting it to its original format is also not likely to happen. Instead, hearings about payday lending industry and CFPB may be what takes place. And, it could have some political ramifications at the end of it all.