The <i>Real</i> Battle Over Payday Lending Has Just Begun

WASHINGTON — The Consumer Financial Protection Bureau's plans for revamping payday lending set off a fierce debate Thursday over whether the agency had gone too far or not far enough, proving that this is likely to be one of the trickiest rulemakings the agency will ever attempt.

Under the proposal, the CFPB would give lenders two options: either ensure borrowers have the ability to repay before issuing credit or comply with limitations after the loan is issued such as restricting how often it can be rolled over or reissued within a certain time frame.

Industry representatives wasted no time in declaring that the plan was too broad and would cut off access to small-dollar credit, but consumer groups said the multiple options created "loopholes" for lenders to exploit.

"Our preliminary review indicates customer will lose many of the credit options currently available today," said Edward D'Alessio, executive director of the Financial Service Centers of America, during a field hearing on the issue held by the CFPB. "Our employee base is very diverse. Approximately 80% are women, more than two-thirds are minorities … a rulemaking that causes FSCA members to close their doors will severely impact these hardworking employees and their families."

The CFPB has not formally issued the proposals yet, but instead will discuss its plans during a mandatory Small Business Review Panel review. The agency announced early Thursday how it wanted to regulate the industry, creating parallel sets of rules that either "prevent" a consumer from falling into a debt trap or "protect" them once they take out credit.

Consumer groups argued that the CFPB should have mandated an ability-to-repay assessment for all payday-type loans.

"Most lenders already follow the ability-to-repay principle, and we applaud the CFPB for applying it to small-dollar lending practices as well. At the same time, we are concerned about the impact of any kind of safe harbor provision that could continue to expose some borrowers to prolonged and expensive cycles of debt," said Wade Henderson, president and chief executive of the Leadership Conference on Civil and Human Rights, who also appeared at the field hearing. "So as the CFPB moves forward with this rule, we urge you to make the most of your authority to protect all Americans, including communities of color, from the scourge of predatory payday loans."

Although the CFPB is long way from a final rule, its ultimate regulation is likely to remain tough. The agency's plans immediately received backing from President Obama, state finance departments and attorneys general, some of the strongest support it has received publicly during any rulemaking process.

Obama even touted the CFPB's payday lending plans in a speech Thursday in Alabama.

"Today, the CFPB announced that it's taking an important first step towards protecting consumers from getting stuck in these cycles of debt. The idea is pretty common sense: if you lend out money, you should first make sure that the borrower can afford to pay it back," said Obama while speaking at the Lawson State Community College in Birmingham. "As Americans, we believe there's nothing wrong with making a profit. But if you're making that profit by trapping hardworking Americans in a vicious cycle of debt, then you need to find a new way of doing business."

Virginia Attorney General Mark Herring, meanwhile, spoke at the CFPB's field hearing in Richmond, endorsing the agency's approach. He used the hearing to announce that his department would issue a plan to stop "predatory lending" in the state.

"By May 1, I will have on my desk a plan for reorganizing and revitalizing my consumer protection section with a core focus on fighting predatory lending," Herring said. "This is a process that is already underway and we are exploring a number of strategies including enforcement actions against lenders who withhold terms or operate outside of their license … or whether additional legislation is needed to close loopholes that lenders have exploited."

Industry representatives and payday lenders are concerned, however, that some of the requirements the CFPB is considering could conflict with existing state laws.

"In my initial read of this document, it will be extremely difficult to mesh these guidelines with state laws if not impossible," said D. Lynn DeVault, a board member at the Community Financial Services Association of America and Check into Cash. "The CFPB's proposed rules are not consumer-centered. In fact, they're more closely centered on the consumer advocacy groups' belief of what is right for the consumer; and skewed towards those who wish to eliminate the industry, not a fair regulatory environment for consumers and providers."

CFPB Director Richard Cordray heavily emphasized two areas during his own remarks: having an ability-to-repay requirement and stopping lenders from directly withdrawing payments from bank accounts, which can lead to repeat fees.

"The true costs, taken in the aggregate, of a lending model that rests on the ability to collect, rather than the ability to repay, must be kept in mind as we assess the effects on consumers, especially those who were already experiencing financial difficulties when they took out the loan in the first place," he said. "We recognize that consumers have a legitimate need to access credit to meet their particular circumstances. But consumers need credit that helps them, not harms them."

Banks and credit unions have long argued that they have their own underwriting standards before issuing a payday-type loan but those rules have also driven consumers to seek loans outside the traditional banking system. Because of this, some say the CFPB's plan, which would cover all lenders including storefront and online payday lenders, would at least level the playing field.

"One thing we're suspecting is that this is going to open the door for the banking industry to reenter this marketplace," said Travis Sabalewski, a partner and member of the financial industry group at Reed Smith. "The traditional banking industry will be on a level playing field and payday lenders will now also be required to do the front-end work of determining a borrower's ability to repay."