The Trump administration continues to gut the agency created with the specific purpose of protecting consumers.
This week, the Consumer Financial Protection Bureau proposed pulling back on rules for payday loans, car-title loans and small-dollar forms of credit. Under the Obama administration, the CFPB issued a rule that would require lenders to make sure borrowers have the means to repay their loans. The rule was set to take effect Aug. 19.
But now, under a new regime intent on looking out for lenders first, the CFPB wants to water down its own payday-lending protections.
“The bureau is preliminarily finding that rescinding this requirement would increase consumer access to credit,” the agency said in a release.
Translation: Let’s help lenders make more money off financially vulnerable consumers.
I have never been a fan of payday loans or similar products marketed to people with cash-flow problems. Lenders advertise that these loans are a saving grace for people. Short on cash? No problem, take out a payday loan. Or borrow against your paid-off automobile.
The loans are supposed to be paid back in full quickly, typically in a few weeks when the borrower gets his or her next paycheck. All a borrower needs is a bank account and income. They can give lenders a postdated personal check or authorize an electronic funds withdrawal.
Here’s the problem, one that those of us who work with people with chronic cash-flow issues fully understand. By the next payday, many borrowers can’t pay off the loan. Thus begins a debt cycle of payday loans.
Consumer advocacy groups have long been critical of payday loans because when the fees are annualized they often amount to triple-digit interest rates — more than 1,000 percent in some cases. The groups argue that the loans take advantage of cash-strapped consumers.
“While not perfect, the CFPB’s final payday lending rule was a giant step toward helping struggling families avoid debt traps. The regulation would have simply required that payday lenders consider whether loan applicants could afford their loan before extending credit,” said Christopher Peterson, director of financial services for the Consumer Federation of America. “Less than a day after calling for compromise and unity in his State of the Union address, President Trump’s consumer protection agency is proposing to eliminate rules, arrived at by compromise, which would protect struggling consumers from triple-digit interest loan traps.”
There is no question that many people living paycheck to paycheck are unable to cover financial emergencies. The payday industry argues their loans are better than using high-interest credit cards. But it’s equally bad to borrow against your next paycheck. If you’re flailing now, won’t you be just as short of money next payday?
“The CFPB’s latest proposal will leave struggling borrowers vulnerable to falling further behind by giving payday and other high-cost lenders the green light to continue trapping them deep in debt,” said Suzanne Martindale, senior policy counsel for Consumer Reports.
The Financial Service Centers of America (FiSCA) called the possible rollback of regulations a “thoughtful proposal.”
“We want to be clear that our industry never advocated for an environment without regulations. Rather, we support an environment in which consumers can continue to access responsible credit products through regulated lenders,” said Ed D’Alessio, executive director of FiSCA.
The agency has opened a 90-day period for the public to comment.
I hope enough people who have been negatively affected by payday loans let their voices be heard.