CFPB’s move to gut consumer protections shows need for state-level payday lending reform

The Consumer Financial Protection Bureau (CFPB) should serve consumers, not the industries it regulates. That’s why Alabama Arise submitted a comment last week objecting to the CFPB’s plan to reverse an important consumer protection. And that’s why Arise will continue to push for needed reforms at the Legislature.

The federal ability-to-repay rule, set to take effect in August, would require payday and title lenders to ensure borrowers could repay loans they take out. In 2017, the CFPB under then-director Richard Cordray created the rule to help shield consumers from getting caught in cycles of deep debt.

Like many state-level protections, the CFPB’s rule also aims to provide an escape valve for borrowers caught by predatory lenders. It would allow borrowers to repay the loan in installments by repaying a portion of the loan at a time and reborrowing the rest.

For many borrowers, that greater flexibility would lessen the damage from high-cost payday loans. Alabama allows lenders to charge annual percentage rates (APRs) of up to 456% on a two-week payday loan. The CFPB’s new protection wouldn’t reduce the absurdly high interest rates that payday loans carry. But it would provide a more realistic pathway out of debt for people who desperately need one.

Thousands of Alabamians took out 30 or more payday loans last year. That’s not a healthy borrowing pattern, and it doesn’t result from people borrowing for short-term emergencies. Nobody has 30 water heaters break in a year (despite what a flood of copycat comments might have you believe). The CFPB’s rule would help keep borrowers from becoming trapped in the debt cycle.

Foxes overseeing the henhouse

If Cordray were still running the CFPB, the original rule might be implemented this summer as scheduled. And that rule could shape a healthier lending market, free from many of the abuses pervading the payday lending industry.

Unfortunately for struggling borrowers, the CFPB’s leaders since 2017 have worked to undermine its foundations. During his time as acting CFPB director, Mick Mulvaney began the attempted rollback of the ability-to-repay rule, as well as other measures to weaken consumer protections. Industry groups have supported the repeal effort every step of the way.

Current director Kathy Kraninger has continued and fully endorsed Mulvaney’s approach. Kraninger said during her confirmation hearing last year that she couldn’t identify “any actions” of Mulvaney’s “with which I disagree.” Kraninger also couldn’t estimate or calculate the APR on a payday loan under questioning from U.S. Rep. Katie Porter, D-Calif., in March. It was a sad display from the head of an agency that’s supposed to stand up for consumers.

Alabama can’t rely on the federal government to protect consumers

The regulatory capture at today’s CFPB shows that we can’t wait for federal action to protect consumers. It’s up to the Alabama Legislature to limit exorbitant APRs on payday loans, and lawmakers have numerous options. Reform efforts have ranged from a 36% APR cap to a more modest plan that would give borrowers 30 days to repay loans, up from as few as 10 days now.

All these reform efforts have the support of a majority of Alabamians. But under pressure from the powerful payday lending industry, legislators keep killing these proposals in committee year after year.

The federal backslide on regulation of payday lenders is a significant barrier to a more reasonable lending environment. But it’s not the end of the story. Progress is possible at the state level, and it will require an overwhelming push from Alabamians demanding change. The path forward on payday lending reform begins with folks like you.