Critics last week slammed proposed new federal regulations to rein in high-interest payday loans, saying that the rules would do consumers more harm than good.
And that’s not the only thing weighing on the agency that proposed the rules. The federal Consumer Financial Protection Bureau (CFPB) took a legal hit Tuesday as an appeals court found the bureau’s governing structure unconstitutional. The decision by the U.S. Court of Appeals for the District of Columbia Circuit also overturned a $109 million bureau enforcement decision against the mortgage lender PHH Corp.
Even so, a bureau spokesperson told AMI Newswire that its work to protect consumers would continue.
“Congress has charged the bureau with ensuring that the markets for consumer financial products and services are fair, transparent and competitive, and with protecting consumers in these markets from unlawful practices,” the spokesperson said in an email Tuesday. “Today’s (court) decision will not dampen our efforts or affect our focus on the mission of the agency.”
The comment period on the bureau’s proposed payday loan rules ended Friday, meaning that the bureau will now review the nearly 200,000 comments on the proposal prior to crafting a final rule.
The American Bankers Association and a public policy institute report both criticized the payday loan proposal, which the bureau said would help protect consumers from becoming snared by spiraling debt. Consumer advocacy groups support the plan and argue it's necessary to shield consumers from getting caught up in longer-term debt scenarios that affect every aspect of their personal finances.
Payday loans are typically made for $500 or less, have average annual interest rates of more than 300 percent and are due on a consumer’s next payday. The small-dollar loans remain in high demand, reflecting that 47 percent of Americans cannot cover an emergency expense of $400 or more with their savings, according to the American Bankers Association.
The proposed rule calls on lenders to verify that customers have the means to pay back the loans on time, according to bureau Acting Deputy Director David Silberman in an article on the agency’s website. It would also bar repeated payday loan applications in order to protect consumers from becoming caught in a debt trap, according to the agency.
The bureau's research concluded that most consumers can't pay back their initial loans by their next paycheck and engage in repeat short-term borrowing that can lead to bank penalty fees and high default rates.The agency's proposed rules aim to prevent such financial pain, the bureau said.
In response to the proposal, the Center for Responsible Lending called for even stronger regulations that apply proposed protections to longer-term loans. The center concluded that lenders' ability to coerce repayments over time, along with high interest rates and fees, create incentives for making unaffordable loans.
"Payday and car title lending cause real and significant harm to borrowers, their families and communities," Mike Calhoun, the center's president, said last week in a prepared statement. "They lead to a cascade of financial consequences such as bank penalty fees, bankruptcy and loss of cars and bank accounts. They kill hope and steal futures."
An analysis by the Competitive Enterprise Institute, however, said regulators have presented no evidence that payday loans harm consumers or that reining in such loans will improve their welfare. Indeed, limiting access to such loans would lead borrowers to seek even worse options such as loans that carry heavy late fees, or they might seek out illegal loan sharks, the institute said.
“People sometimes face emergency or unexpected financial shortfalls that cost much more than the finance charge of a payday loan, such as cut-off utilities, a repossessed car, late fees, missed work time or eviction,” said report author Hilary Miller, chairman of the Consumer Credit Research Foundation. “Payday loans give people a chance to prevent real hardships.”
In reviewing the bureau’s data, Miller found that only a fraction of payday loans – less than one-fifth – are a sequence of more than seven loans. The bureau’s proposal would restrict most payday loans to only two rollovers, Miller said, even though regulators didn’t offer evidence that longer sequences of loans cause financial harm to consumers.
The proposed regulations attempt to steer banks into providing more small-dollar loans to consumers, but Virginia O’Neill, a senior vice president with the American Bankers Association, expressed doubt that the bureau’s proposal would accomplish this.
“The costs, complexity and compliance risks presented by the proposed rule can restrict banks from making these loans …” O’Neill said in a letter to the bureau. “The proposed rule spans a jaw-dropping 1,341 pages – to regulate loans that, according to the bureau, average only $350 and whose terms are clear and simple.”
Under the proposal, the costs and risks of making such small-dollar loans would be out of sync with any reasonable return a bank could expect, she said. As a result, banks could not make such loans in a safe or cost-effective manner.
The association also argues that the
lacks the legal authority to impose such a rule, that the rule violates the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and that it places illegal limits on interest rates.
Sen. Elizabeth Warren (D-Mass.), who originally proposed the creation of the bureau, continues to stand by the agency despite the pushback it has received over the past week. Warren downplayed the significance of Tuesday’s appeals court decision.
“Even if it stands, the ruling makes a small, technical tweak to Dodd-Frank and does not question the legality of any other past, present or future actions of the CFPB,” Warren said in a prepared statement.
The court decision dealt with the agency’s illegal governing structure by striking a provision of the law that said the president could remove the bureau’s director only for cause. The president will now have the power to remove the director at will and will have more power to supervise the director, the ruling said.
The bureau, meanwhile, argues that the decision by Congress to make the director removable only for cause is in line with past Supreme Court decisions. The agency is now reviewing options to challenge the federal appeals court’s ruling, a bureau spokesperson said.