The Consumer Financial Protection Bureau plans to revive the “ability to pay” rule, repealed in the Trump era, a move that will strengthen its grip on payday lenders. While it may be beneficial to eliminate deceptive payday lending practices, the new rule may stifle the growth of specialist lenders and deprive borrowers of a valuable source of funding, sources say.
Since President Joe Biden took office, CFPB’s new leadership has not shied away from announcing aggressive plans to regulate consumer protection violations, ranging from restoring the fair loan unit to the police. student loan service practices. In recent weeks, Acting Director David Uejio has spoken specifically on revitalizing the payday loan rule to require an assessment of consumers’ ability to pay, a rule from 2017 that was repealed under the previous administration. .
“The CFPB is keenly aware of the harm done to consumers in the low dollar lending market, and is particularly concerned with the business model of any lender that depends on the inability of consumers to repay their loans,” Uejio wrote in a last week’s release, its latest commentary around reinstating the repayment capacity rule of 2017. “As the business models of low dollar lenders continue to rely on consumers’ inability to repay, these practices cause damage which must be dealt with by the CFPB.
Of the many policies promised, the repayment capacity rule may also have “the most significant chilling effect” on capital markets, said a banking partner at a Washington DC-based law firm. Lenders, ranging from auto lenders to market lenders, will suffer from having to comply with the new rule imposed.
“If reinstated, the payday loan rule will be quite onerous for those who find themselves in the small dollar lending space,” the partner said.
On the other side of the equation, borrowers will also be strongly affected by the reinstated rule, sources said.
“First, the sad reality of a payday borrower is that they usually do not have the realistic ability to repay – they are usually in an immediate precarious financial situation and are forced to make a personal choice to take out a loan on their payday loan. salary and avoid a looming financial crisis. result at the expense of a longer term financial obligation, ”said Joseph Lynyak III, partner at Dorsey & White.
Lynyak’s expertise includes regulatory reform, Dodd-Frank and the CFPB. “Imposing a repayment capacity rule in this space will only exclude the only way a borrower can have to prevent or delay a catastrophe in the short term,” he added.
Rather than stifle all payday lending activity, sources say it may be more effective for the CFPB to work with banks and credit unions to provide borrowers with payday loan substitutes so that borrowers don’t lose a potentially valuable source of debt consolidation and management. . Many of these institutions have already been in the business of payday lending or subprime mortgages, but have been forced to step down by regulators.
“State legislatures have been very effective laboratories in solving the payday loan problem,” added Lynyak. “At a minimum, the CFPB should enable innovative state laws to address and regulate unfair and deceptive payday lending practices. “