As Americans struggle to cope with the devastating economic impact of the COVID-19 pandemic, the Consumer Financial Protection Bureau (CFPB) and the Federal Deposit Insurance Corporation (FDIC) took steps to weaken critically important consumer protections from high-cost, payday loans.
The CFPB issued a new final payday loan rule earlier this month that effectively guts the 2017 Payday Rule. The new rule specifically rolls back important underwriting provisions which required lenders to establish the borrower’s ability to repay the loan according to the lender’s terms. This ability to repay standard is critical to protecting consumers from an endless, destructive debt cycle.
“The CFPB is empowering predatory lenders at a time when it should be focused on its mission, to protect consumers in the financial marketplace,” said CFA Legislative Director and General Counsel Rachel Weintraub. “Payday loans already disproportionately harm the financially vulnerable. To prioritize the payday loan industry over American consumers and their families during a financial crisis is not only cruel, but a failure to fulfill [the CFPB’s] mission,” she added.
“By disproportionately locating storefronts in majority Black and Latino neighborhoods, predatory payday lenders systemically target communities of color further exacerbating the racial wealth gap,” said Rachel Gittleman, CFA Financial Services Outreach Manager. Black Americans are 105% more likely than other races and ethnicities to take out payday loans, according to the Pew Charitable Trusts. According to a 2017 FDIC study, 17% of Black households were unbanked and 30% were underbanked, meaning they had a bank account but still used alternative financial services like payday loans, compared with 3% and 14% respectively of white households. “Payday lenders prey on un- and underbanked Americans by offering short-term loans developed to trap borrowers in a debilitating cycle of debt,” Gittleman said.
Payday loans, which often carry an annual interest rate of over 400%, trap consumers in a cycle of debt. The CFPB itself found that a majority of short-term payday loan victims are typically trapped in at least 10 loans in a row — paying far more in fees than they receive in credit.
Meanwhile, the FDIC finalized a rule last month that will encourage high-cost, non-bank lenders to launder their loans through banks in order to offer triple-digit interest loans in states with usury laws. The Office of the Comptroller of the Currency (OCC) had finalized a similar rule a month earlier, but most banks participating in rent-a-bank schemes are FDIC supervised. CFA joined numerous other consumer groups, civil rights organizations, faith groups, and small businesses to condemn the rules in a comment letter earlier this year.
“The FDIC’s rule will facilitate the spread of predatory, high-cost lenders, and promote the evasion of state usury laws,” Weintraub said.
These rules allow banks, which are generally exempt from state rate caps, to sell, assign, or transfer a loan to non-bank lenders and deem that the interest rates permissible by the bank remain permissible after the transfer. Although 45 states and the District of Columbia have imposed interest rate caps on many types of small loans, high-cost lenders take advantage of the bank exemption by entering into rent-a-bank schemes where they launder their loans through these banks to charge exorbitant interest rates, well above state usury rates.
“States have seen the financial wreckage caused by predatory lenders that target the financially distressed and leave them in a devastating cycle of debt,” Gittleman said. “Consequently, states have enacted interest rate caps, which have proven to be the most effective way to protect consumers from unaffordable loans. The FDIC joins the OCC in paving the way for predatory lenders to circumvent state rate caps in the midst of a financial crisis, when they should be protecting consumers rather than enabling rent-a-bank schemes,” she added.
“In the absence of regulatory oversight, Congress must act to protect consumers from high-cost lending schemes,” Weintraub stated. “Rates on high-cost credit should be capped at 36% during the remainder of the COVID-19 emergency and its financial aftermath. Following a temporary fix, Congress must pass H.R. 5050/S. 2833, the Veterans and Consumers Fair Credit Act, to permanently cap interest rates at 36% for all consumers,” she concluded.