Federal regulators on Thursday unveiled rules that could mean a death sentence for the payday lending industry, a cause that has already sparked infighting between mainstream Democrats like Debbie Wasserman Schultz and the party’s Elizabeth Warren wing.
The industry has exploded over the past decade as millions of Americans struggle just to cover their living expenses. Yet critics have long accused lenders of trapping low-income workers – often single and minority women, a grassroots Democratic constituency in an election year – into a cycle of borrowing at exorbitant interest rates.
The Consumer Financial Protection Bureau will discuss the rules at a hearing in Kansas City, Missouri – a state where storefront lenders outnumber McDonald’s and Starbucks franchises. Among the measures are limits on how often borrowers can get payday loans and a requirement that lenders verify that people can repay the money without incurring new debt, thereby avoiding the so-called debt trap. debt.
The rules come after more than three years of furious lobbying by consumer and industry advocates, who spent $ 3.6 million last year alone. Payday lenders say they provide a lifeline for many borrowers facing emergencies who are cut off from other sources of funding.
The debate spawned bipartisan legislation backed by Wasserman Schultz to delay the new rules by two years, a move she said would give states time to pass tougher laws. This position has attracted attack advertisements from opponents of the industry. Allied Progress, a liberal group, recently launched a $ 100,000 advertising campaign against Wasserman Schultz, the chair of the Democratic National Committee who faces a major challenge this year in her congressional district of South Florida. The group cites the $ 68,100 in contributions it has received from payday lenders since 2006.
The legislation also invited a severe rebuke from Warren, (D-Mass.), The architect of the CFPB.
“When emergencies arise, people need access to credit, but payday lenders who build business models around trapping people in a never-ending cycle of debt throw bricks at a drowning man,” Warren said at a Senate Banking Committee hearing in April.
The bill, drafted by Republican Florida Rep. Dennis Ross, also calls on the agency to defer to requirements state legislatures place on lenders. He lingered on the House financial services committee despite attempts by Wasserman Schultz to rally Democrats to support the measure.
Wasserman Schultz said she supported the CFPB and repelled Republican attempts to clear the office. But she defended the bill, which she said would “hit the pause button” while other states pass measures like Florida’s. Lawyers say Florida laws haven’t gone far enough and the Sunshine State has remained a business hub for an industry that has faced crackdowns from state legislatures across the country .
“Payday loans are unfortunately a necessary component for people to access the capital of the working poor,” she told CBS Miami in April. “I have no doubts that the Bureau of Consumer Financial Protection, whether this bill becomes law or not, will ultimately do what is right, and I will support whatever it decides.”
Spokesmen for Wasserman Schultz and Warren did not respond to a request for further comment.
The industry could be eased from the rules if Republican Donald Trump visits the White House. Trump has announced that he will abolish the Dodd-Frank Act of 2010 that created the CFPB. Hillary Clinton, who is set to take the Democratic presidential nomination, supported the office and its approach to the industry.
The CFPB rules cover not only what one industry group estimates to be the more than 16,000 traditional lenders, but also online payday lending where much of the recent growth has taken place, auto title lending and debt. ‘other offers of advance on deposit.
While the CFPB does not have the power to restrict the interest rates charged on short-term and small dollar loans, its lending requirements would effectively trump state laws that advocates deem too weak. .
“Too many borrowers looking for short-term cash are struggling with loans they cannot afford and are taking on long-term debt,” CFPB director Richard Cordray said in a statement. “It’s a bit like getting in a cab just to cross town and get stuck on a ruinous and expensive trip across the country.”
According to the proposals released Thursday, lenders will be required to determine in advance whether a borrower can afford to repay the full amount of each payment owed while still being able to meet living expenses and other financial obligations.
The rules would also prevent lenders from offering a new loan to a borrower for 30 days if they had already taken out three in a row. This is aimed at reducing repetitive borrowing just to pay off old loans. And the proposal would prevent lenders from attempting to debit a borrower’s bank account more than twice without further authorization if they lack the cash to repay a loan.
The rules “could dramatically reduce unaffordable and debt-trapped loans and encourage the availability of more responsible credit,” said Mike Calhoun, president of the Center for Responsible Lending, a nonprofit group that has advised the office, before their release.
While the industry says it wants to get rid of bad players, lobbyists say small loans will dry up if the bureau moves forward as aggressively as it has indicated.
“If the CFPB rules sound like the concepts outlined last year, they will endanger access to credit for the millions of Americans who responsibly use short-term loans to manage their finances,” said Jamie Fulmer , senior vice president of public affairs at Advance. America, a large payday lender. “For regulated businesses that offer the preferred credit option of these consumers, especially small lenders, this would amount to a death sentence.”
Dennis Shaul, chief executive of the Community Financial Services Association of America, said in a statement that the rules are a “huge blow” to those looking for these types of loans.
“What is missing from the bureau rule is an answer to the very important question, ‘Where will consumers go for their credit needs in the absence of regulated non-bank lenders?” Said Shaul.
The industry group says uncertainty over the new rules, as well as changes in business models, have already taken their toll on lenders.
State legislatures across the country are deeply divided over how the industry should be restrained – if at all – resulting in a tapestry of varying restrictions. According to Pew Charitable Trusts, 27 states still allow the offer of payday lenders and loans with annual interest rates above 391%. Another 24 have either banned storefront businesses altogether or limited what they can charge, usually by capping interest and fees. Pew said some 12 million Americans borrow from payday lenders each year. In 1 in 5 cases, the borrower is forced to contract seven or more loans to pay the initial amount, says the CFPB.
Meanwhile, consumer advocates have lobbied the bureau not only to crack down on bad deals, but to make room for cheaper alternatives that banks and credit unions can offer instead.
The typical payment owed on these loans is about a third of a borrower’s salary, according to Pew.
“It’s unaffordable and it blows a borrower’s budget,” said Nick Bourke, who leads Pew’s research on consumer issues.