An Unwelcome About-Face on Payday Lending

(Bloomberg Opinion) -- In its seven-year history, the Consumer Financial Protection Bureau has done a lot of good. Among its most notable achievements: Last year, it issued the first federal rule to curb the predatory aspects of the small-sum, short-term credit known as payday lending and to encourage mainstream banks to offer better alternatives.

The bureau, now under new leadership, wants to dismantle the rule before it can fully take effect. Democratic legislators, having gained control of the House of Representatives, should do what they can to resist.

Sometimes it can make sense to pay $60 to borrow $400 for a couple weeks — for example, to fix a car you need to get to work. But such loans can trap borrowers in cycles of debt. Often, they are meant to do just that. Unable to repay, people borrow again and again, paying much more than the original amount in interest and fees. By encouraging such behavior, payday lenders extract billions a year from the poorest and most vulnerable Americans.

The CFPB struck a reasonable balance between stopping the worst abuses and keeping emergency credit available. It gave lenders two options: Verify customers’ ability to pay, or allow them to return the money more gradually. The rule applied only to the most problematic loans — those with terms of less than 45 days. This was meant to nudge banks to enter the market with less expensive, longer-term loans.

The rule began to have the desired effect long before August 2019, the deadline for the industry to comply. Earlier this year, for example, U.S. Bank started offering short-term, small-sum loans to its checking-account customers. The interest on a three-month installment loan of $400 could be as little as $48, compared with about $360 for a succession of payday loans.

Payday lenders weren’t happy. In April, two industry groups filed a lawsuit seeking to invalidate the rule as arbitrary and capricious – despite the fact that the CFPB had sought public comment, revised its initial proposal in light of that, and gave lenders nearly two years to comply.

Nonetheless, the industry found an ally in acting CFPB director Mick Mulvaney (succeeded this month by Kathy Kraninger, who worked under him at the Office of Management and Budget). Soon after his appointment in November 2017, the bureau announced that it would review the rule. And in October it said it would focus on the ability-to-pay requirements when it proposes changes early next year. This could undermine the whole effort: If the industry can keep making loans that people can’t pay back, then people will keep getting trapped into exorbitant fees that frequently leave them in deep financial distress.

Here’s where congressional Democrats come in. Turning the CFPB’s original rule into statute probably isn’t an option, given Republican control of the Senate. But by holding hearings on the CFPB and payday lending, the House Financial Services Committee, expected to be chaired by Maxine Waters, could draw attention to this misguided action and make it harder to carry through. Maybe this bad policy can’t be stopped — but it can at least be made to carry a political price.

Editorials are written by the Bloomberg Opinion editorial board.

©2018 Bloomberg L.P.