Treasury Says CFPB’s Payday Lending Rule Is Unnecessary

By Evan Weinberger

The Treasury Department is urging the Consumer Financial Protection Bureau to rescind its payday lending rule, which it labeled “unnecessary” because states can provide more effective oversight of the industry.

Treasury’s recommendation, in a comprehensive July 31 report on creating a new regulatory environment for financial technology firms, tracks closely with the payday lending industry’s desires. Acting CFPB Director Mick Mulvaney announced in January that the bureau was “reconsidering” the rule, which was finished in October 2017.

The report is likely to fuel consumer groups’ fears that the reconsideration will ultimately lead to the repeal of the payday lending rule, while encouraging industry groups, which have expressed frustration that Mulvaney’s CFPB has not already killed the regulation.

Congress failed to repeal the rule when it had the chance due in part to public support for the regulation, but the Treasury Department’s added push to rescind the rule could give the CFPB under Mulvaney additional cover to do so, Scott Astrada, the federal advocacy director at the Center for Responsible Lending, told Bloomberg Law.

“The concern is that this recommendation would legitimize that effort,” he said in a July 31 phone interview.

Payday Limits

The CFPB’s payday lending rule governs short-term loans, which typically mature within every two weeks and can have interest rates as high as 400 percent. Critics of the loans say that they can trap consumers in a cycle of debt that can take years to escape.

To combat that, the CFPB set tough ability to repay standards where payday lenders would have to determine whether consumers could afford their loans while still paying vital rent, utility, and other expenses. There are also limits on how many times consumers can take out those loans in consecutive pay periods.

Mulvaney has said the CFPB will consider the rule, but has not officially delayed implementation, which is set for next August.

Payday lenders are challenging the rule in court, but say that unless the rule is rescinded quickly or the implementation date is delayed soon they will have to begin preparing for the regulation to go into effect. That could mean many businesses will shutter, they say.

States Should Take the Lead

Treasury said that the rule is not necessary because states have already showed that they can regulate the industry themselves. Currently, 37 states allow payday lending of some sort, with each state setting their own interest rate, repeat customer and other regulations.

The CFPB is barred from setting interest rates.

According to the Treasury Department’s report, that state-based regulation is sufficient.

The CFPB’s rule does not take into account the real demand for payday loans, Treasury’s report added.

“These products serve a unique niche of consumers that may not have many alternatives to high-priced credit,” the report said.

Many payday customers either use the loans to smooth out monthly shortfalls or do not have sufficient access to credit to avoid taking out payday loans, the report said.

The CFPB could not immediately be reached for comment on July 31.

Getting Banks Involved

In addition to calling on the CFPB to rescind the payday rule, the Treasury report supported moves by the Office of the Comptroller of the Currency to encourage banks to get into the small-dollar loan business.

The report also called on the Federal Deposit Insurance Corp. to rescind guidance that it issued in conjunction with the OCC in 2013 that pushed many banks out of small-dollar loans. The OCC rescinded that guidance in October and issued a bulletin earlier in the summer encouraging banks to get into the market and take market share away from payday lenders.

Jelena McWilliams, the FDIC’s new chairwoman, has indicated a willingness to allow banks to issue small-dollar loans, but has yet to rescind the 2013 guidance.

Fifth Third Bancorp already offers “Bank Early Access” that provides a product that shares some characteristics to payday loans but with protections including a $1,000 limit on loans. McWilliams was Fifth Third’s chief legal officer prior to taking over as FDIC chair this year.

To contact the reporter on this story: Evan Weinberger in New York at eweinberger@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.