CFPB will remove the key subscription part of the troubleshooting rule

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The Consumer Financial Protection Bureau is expected to eliminate underwriting requirements in a long-awaited overhaul of its payday lending rule, according to sources familiar with the bureau’s proposal.

The CFPB expressed interest in “reviewing” the repayment capacity provisions of the 2017 small loan rule issued by former director Richard Cordray in October.

But sources familiar with the agency’s thinking say the CFPB – now led by Trump-appointed Kathy Kraninger – has concluded that the best approach is to remove those provisions altogether. Under the current rule, which has not yet fully come into effect, lenders must check a borrower’s income as well as debts and other expenses, in order to assess their ability to repay their credit while facing the debt. living expenses.

Such a course would empty the centerpiece of a rule that consumer advocates had hailed as a preventative measure against skyrocketing debt for consumers who depend on short-term credit.

The agency under CFPB acting director Mulvaney signaled its intention to reopen the rule as early as January 2018. Now acting White House chief of staff, Mulvaney has sided with two trade lending groups on salary who sued the CFPB in April to overturn the regulations. restrictions.

In court documents, the CFPB argued that payday lenders would suffer “irreparable harm” as a result of the 2017 final pay rule and that it was “in the public interest” to reopen the regulation.

“Lenders across the market will face substantial declines in their income once the rule’s compliance date goes into effect, which will lead many to exit the market,” the agency said in a motion. .

But while Mulvaney and Kraninger have both supported the use of statistical analysis to assess the cost of regulation, some lawyers and consumer advocates say it is not clear how the CFPB will explain the changes to the regulations. underwriting requirements because no new research on payday loans has been published in the past year.

“Completely hollowing out the repayment capacity requirement is going to be difficult for the office to defend,” said Casey Jennings, attorney at Seward & Kissel and former attorney for the CFPB regulatory office, who worked on the 2017 rule.

The 2017 Final Payroll Rule stated that it was “an unfair and abusive practice” for a lender to grant a short-term lump sum loan “without reasonably determining that consumers have the capacity to repay. loans on their terms ”.

The CFPB is expected to publish a proposal to reopen the rule for public comment in a few days or weeks. The revised regulations would replace the 1,690-page regulations – the result of five years of research – finalized in Cordray’s final days at the agency.

The latest proposal should also repeal the limits imposed by the rule on repeated borrowing by a single consumer; CFPB data shows that payday lenders rely on re-borrowing as their main source of income.

However, the CFPB should leave intact payment arrangements that would limit the number of times a lender can attempt to extract loan payments directly from consumers’ bank accounts, sources said.

Consumer groups argue that removing basic repayment capacity requirements and borrowing limits would make consumers vulnerable.

“We expect the CFPB to weaken the payday rule to the point that it has no practical value,” said Alex Horowitz, senior researcher on the Pew Charitable Trusts Small Dollar Lending Project.

The office’s statement in October said the agency plans to reconsider only the repayment capacity mandate – not the limit on the lender’s attempts to debit a consumer’s bank account – “largely because the provisions on repayment capacity have far greater consequences for consumers and industry than payment arrangements.

In November, a federal court suspended the August 2019 compliance date for key elements of the original 2017 rule, as the office of then-interim director Mick Mulvaney said it planned to propose changes in January.

The CFPB has overseen the $ 38.5 billion wage industry since its inception in 2011. Meanwhile, payday lenders have fought all efforts by the federal government to regulate the industry.

The two payday lending trade groups that sued the CFPB last year to overturn the 2017 rule claimed the Cordray office had selected research to support strict restrictions on lenders.

“The rule as previously proposed was really just an attempt to penalize the industry,” said Jamie Fulmer, senior vice president at Advance America in Spartanburg, SC, one of the largest payday lenders. “There has been a tremendous amount of academic research on both sides that has been put forward, but the office has only dwelled on research studies that supported their positions and rejected the counter-arguments.”

Payday lenders have sought to frame the debate as one of access to credit, arguing that it makes sense for cash-strapped consumers to have access to short-term, low-cost lending options, and they challenge claims that their business model is predatory.

“Anything that restricts the ability of consumers to access credit when they need it is bad for the consumer,” said Fulmer.

Still, a consumer using one of these options may have to pay up to $ 60 to borrow $ 400 for a few weeks, and their annual interest rates range from 300% to 500%.

Consumer advocates are likely to sue the CFPB for its changes, but can only do so once the rule is finalized.

Eliminating underwriting requirements for payday loans could set “a revolutionary precedent for interpreting the actions of federal agencies,” Jennings said.

Many consumer lawyers believe the CFPB faces a difficult hurdle in defending its changes against charges under the Administrative Procedure Act that new regulations are “arbitrary and capricious”.

“The underlying research hasn’t changed; the only thing that has changed is the agency director, ”Jennings said. “I think it’s entirely possible that a court will find this arbitrary and capricious. ”

The CFPB’s 2017 final payment rule under Cordray aimed to strike a balance by limiting the repeat borrowing that has pushed many borrowers into a cycle of debt, without completely eliminating two to four week loans.

Regulators have also opened the door for banks to engage in installment lending as an alternative to payday lenders.

In May, the Office of the Comptroller of the Currency approved the banks’ affordable installment loan offers. In September, US Bank announced that it would offer installment loans with monthly payments not exceeding 5% of a borrower’s monthly income, at prices significantly lower than a payday loan.

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