Consumer watchdog loosens Obama's payday loan safeguards


The Trump administration plans to ease red tape in the payday loan industry, a controversial activity that is helping millions of Americans to temporarily fend themselves at risk of being trapped in an expensive debt spiral .

The Office of Consumer Financial Protection announced today that it would no longer require lenders to ensure that borrowers are able to repay a payday loan, also known as "repayment capacity". . The CFPB, led by Trump and Kathy Kraninger, former head of the Office of Management and Budget, said this change would eventually increase the availability of payday loans.

The original scheme was developed by the Obama administration under the direction of Richard Cordray, then director of the CFPB. It also included a number of other railings; lenders were prohibited from quickly borrowing small dollar loans and could not attempt more than two payment extractions from the borrower's linked account.

But it is the criterion of the ability to repay which was the true centerpiece of the regulation.

"The principle that lenders must actually assess the borrower's chances of success before taking out a loan is common sense," said Cordray when he unveiled the rule in October 2017.

Supporters of the rule applauded the ability to repay test to dissuade lenders from borrowing frequently and underwritten, but opponents argued that tighter regulation would reduce the availability of credit. Proponents said the rule would prevent borrowers from stalling loans with staggering interest rates; Opponents said the rule would reduce the availability of small dollar loans for Americans who have trouble living from one paycheck to the other.

By canceling the test of ability to repay, Kraninger seems to understand this last interpretation. In a statement, Kraninger accused Cordray of using "insufficient evidence and legal support" to develop the initial rule.

Christopher Peterson, a former CFPB lawyer and professor at the University of Utah, told Yahoo Finance that the removal of the ability test to repay exposed borrowers to interest rate loans to three figures that they would not be able to repay.

"[Trump’s] The consumer protection agency has spoiled the consumer protection compromise laws designed to protect low-income families from predatory death traps, "said Peterson.

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The Community Financial Services Association of America, a trade association representing the small loan industry, wrote in a statement that the CFPB "recognized some of the critical flaws in the rule." Banks are not as active in the area of ​​small loans. – partly because of the existing regulatory bureaucracy – but the American Bankers Association noted that the cancellation of the ability test to repay "eliminates binding and prescriptive underwriting requirements".

But some wish that Kraninger went further by reducing the rules. The CFSA, for example, wrote that it was "disappointed" that the CFPB chose to essentially keep the rest of the rule. Alan Kaplinsky, a partner at the Ballard Spahr law firm, which deals with consumer financial services issues, told Yahoo Finance that payday lenders would have liked a less stringent payment rule regarding how often a lender may try to extract funds from a linked bank account or debit. map.

The rule limits the number of attempts to two (after which the lender must ask permission to retry) to protect consumers from insufficient funds charges, but Kaplinsky says it's all about 39, a useless rule on debit cards that deny transactions if there is not enough money to start.

"It's not going as far as the industry wants," Kaplinsky said of the revised rule.

The rule has evolved since the Trump government took office, when it appointed Mick Mulvaney, the White House chief of staff, now in charge of replacing Cordray as head of the CFPB. But in the absence of clarity at the federal level, some states have intensified their efforts. For example, in November 2018, Colorado voters approved a voting measure limiting payday loans to a 36% APR. Other payday loan regulations exist in various forms in Ohio, Arizona and Montana.

Peterson said that these regulations can be effective and that other countries are also taking initiatives.

The story continues