Under Trump, a new golden age for payday loans
Payday lenders, those usurious operations that profit from providing high-interest loans to the working class and poor Americans, have seen their prospects improve dramatically under the Trump administration and the Republican Congress.
A joint resolution introduced last week by Republican South Carolina Senator Lindsey Graham would remove strict regulations on short-term, low-dollar lenders imposed by the Federal Bureau of Consumer Financial Protection (CFPB) and prevent the agency from ‘issue a similar rule in the future. The resolution marks the latest attempt to denigrate the CFPB, which has become the bane of the payday lending industry in the years following the financial crash.
The rule, which would require lenders, among other things, to confirm that people can actually afford to repay their loans, was due to go into effect in January, but was suspended by Trump-appointed CFPB interim chief Mick Mulvaney.
As the CFPB “reconsider” the law, Mulvaney is said to have granted waivers to companies that would otherwise have to start complying, much to the payday lending industry’s delight. His decision represented a sharp break with the CFPB’s past actions under former chief Richard Cordray, a person appointed by Barack Obama who did not shy away from cracking down on predatory lending practices during his tenure.
On Tuesday, more than 40 Senate Democrats signed a letter to Mulvaney expressing concern over the bureau’s decision to reconsider the new payday loan rule and urging him to keep it intact. But Congress could overturn the rule faster than the now-cheated CFPB, given the lengthy notice and comment procedures the agency would have to go through. Graham filed his resolution under the Congressional Review Act (CRA), which allows lawmakers to remove new regulations that are not passed by Congress within 60 days of coming into force. Under the ARC without a closure requirement, a simple majority in each chamber is all it would take to abolish the rule completely.
A complementary resolution has already been tabled in the House, receiving support from three Democrats and 32 Republicans. A bigger challenge for critics of the rule awaits in the Senate, where Republicans have struggled to muster 51 votes in the past. Graham, who voted in October against overturning a CFPB rule that allows consumers to initiate more class actions against financial companies, could provide a key vote. Of the six Senate Democrats who did not sign the letter to Mulvaney, four face re-election in states Trump won.
The almost total Republican assault on CFPB regulations can be seen as a sizable throwback to the past eight years of campaign contributions from the payday loan industry and its lobbyists. The passage of the Dodd-Frank Act in 2010 and the resulting training of the CFPB in 2011 caused an increase in donations, according to data from Open Secrets. Payday lenders have given members of Congress nearly $ 9 million since 2012, when donations peaked. Of that amount, $ 7 million went to Republicans. Mulvaney himself received nearly $ 63,000 in campaign donations while serving in Congress (he resigned in 2017 when Trump appointed him to head the Office of Management and Budget).
In a memo leaked to CFPB staff in January, Mulvaney left no doubt that big changes were coming to the office. From now on, he wrote, the CFPB will focus on helping not only consumers, but also businesses – as he put it, “those who take loans and those who give them”. Enforcement would be slowed down and payday loan complaints would take a back seat to debt collection complaints. Days before releasing the memo, Mulvaney dropped a lawsuit against four Kansas payday loan companies accused of charging interest rates of nearly 1,000 percent. That same month, he shut down an investigation into the marketing and lending practices of World Acceptance Corporation, one of the nation’s largest payday lenders and a donor to Mulvaney’s congressional campaigns.
Mulvaney rejected suggestions of any potential conflict of interest caused by donations to his Congressional campaigns.
According to data from the Pew Research Center, twelve million Americans use payday loans each year, racking up more than $ 9 billion in interest, penalties and fees.
Most borrowers end up paying more interest, penalties, and fees than they initially received in the form of credit. Payday lenders say they are filling a void left in low-income areas underserved by big banks. Consumer advocates argue that their services do far more harm than good. Without short term loan options, many working class and low income people facing unexpected expenses are forced to turn to a lender. Most borrowers find themselves unable to repay their debts on time and must choose between defaulting on their loans or borrowing more money, almost always opting for the latter option. Nearly 80% of loans are renewed within 14 days, according to the CFPB, leading to so-called “debt traps” for borrowers.
In the past, much of the task of curbing small loan amounts fell to state legislatures (15 states have essentially blocked payday loan abuse by capping rates low or enforcing other laws) . The new CFPB rule would have been the industry’s first major federal regulation. Instead, it’s one step closer to being drawn into the whirlwind of deregulation triggered by the Trump administration.