In an unusual announcement, the Consumer Financial Protection Bureau (CFPB) says it is backing off enforcement of rules for payday and car title lenders as well as for "certain high-cost installment loans."
A separate report today says that the CFPB intends to revoke its Buy Now, Pay Later interpretive rule. That's according to a status report and joint motion to stay filed by the Bureau and the Financial Technology Association (FTA) in a case brought by the FTA challenging the rule.
Payday and vehicle title loans are generally regarded as predatory because they tend to entrap consumers in a never-ending cycle of debt. Payday loans are illegal in at least 18 states and Washington, D.C., either because they are banned outright or because the states have capped interest rates at 36%.
Car title loans are banned or capped in at least 30 states.
Consumer advocates were not pleased with the announcement.
“By allowing payday lenders to repeatedly debit borrowers' empty bank accounts, the CFPB’s political leadership is giving a free pass for payday lenders to kick people when they’re down ,” said Nadine Chabrier, senior policy and litigation counsel at the Center for Responsible Lending (CRL).
400% interest rates
Payday loans are small loans, typically less than $500, with triple-digit interest rates—nearly 400% Annual Percentage Rate (APR) on average—that are usually due on the borrower’s next payday.
These loans are repaid by a personal check held for deposit or, more commonly, electronic access to a bank account.
"Lenders market payday loans as quick cash to cover a financial emergency, but research demonstrates they often lead to a cycle of debt that is nearly impossible to escape," according to a recent CRL report.
"Due to the unaffordable and predatory nature of these loans, most borrowers end up reborrowing multiple times and paying more in fees than they originally received in credit," the report found.
CFPB's explanation
In its statement, the CFPB says it "will not prioritize enforcement or supervision actions with regard to any penalties or fines associated with the Payment Withdrawal provisions and the Payment Disclosure provisions" and "will instead keep its enforcement and supervision resources focused on pressing threats to consumers, particularly servicemen and veterans."
"The Bureau takes this step in the interest of focusing resources on supporting hard-working American taxpayers, servicemen, veterans, and small businesses," the CFPB said, adding that it "is further contemplating issuing a notice of proposed rulemaking to narrow the scope of the rule."
Consumer organizations, however, say that service members and veterans are no strangers to payday and car title loans.
A study by the CRL found that active-duty military personnel are three times more likely than civilians to use payday lenders, with one in five having used such services in the past year, according to Military Connection.
Research published in the Journal of Law and Economics indicated that about 9% of all enlisted personnel and 12% of mid-level non-commissioned officers have used payday loans, according to Military Benefits Hub.
A survey conducted by the United Way of Central Texas, Texas Appleseed, and United Way of Greater Houston revealed that 45% of veterans surveyed had used a payday or auto title loan, with 24% utilizing these loans more than once per year. In comparison, only 7% of adult Texans reported using such loans.
$2.4 billion in fees
The CRL recently found that in the states that allow payday lending, single-payment and payday installment loans drained more than $2.4 billion in fees in a single year from low-income borrowers.
"In 2022 alone, borrowers took out over 20 million loans, for a total of nearly $8.6 billion," CRL said. "Through storefronts and online, these predatory lenders continue to trap millions of Americans in debt and stifle economic growth in states without debt trap protections. "
Changing course
The CFPB was an early target of the Trump Administration. Its director, Rohit Chopra, was dismissed and much of the staff was fired. Numerous rules and regulations have been axed since then.
Yesterday, the Senate voted to repeal a Biden-era rule adopted by the Consumer Financial Protection Bureau that limits steep overdraft fees charged by large banks and credit unions.
The banking industry has ardently supported the nullification effort, calling on its army of Capitol Hill lobbyists to argue that charging high overdraft fees provides a safety net for many Americans and that limiting fees would cause banks to stop covering overdrafts.
“The CFPB’s actions are government price controls that hurt consumers rather than protect them,” said House Financial Services Committee Chairman Rep. French Hill (R-Ark.).
Earlier today, it was reported that the CFPB has asked a court to reverse a 2023 settlement it won against a mortgage lender accused of racial discrimination.