Ever since president Joe Biden took office, the new leadership at the CFPB has not been shy about advertising its aggressive plans to regulate consumer protection violations, ranging from restoring the fair lending unit and policing student loan servicing practices. In recent weeks, acting director David Uejio has particularly been vocal about revitalising the payday lending rule to require an assessment of consumers’ ability to pay, a 2017 rule that was rescinded under the previous administration.
“The CFPB is acutely aware of consumer harms in the small dollar lending market, and is particularly concerned with any lender’s business model that is dependent on consumers’ inability to repay their loans,” wrote Uejio in a statement last week, his latest comment around bringing back the 2017 ability to repay rule. “To the extent small dollar lenders’ business models continue to rely on consumers’ inability to repay, those practices cause harm that must be addressed by the CFPB.”
Of the many promised policies, the ability to repay rule may also have the “most significant chilling effect” on the capital markets, said a banking partner from a law firm based in Washington DC. Lenders, ranging from auto speciality lenders to marketplace lenders, will suffer from having to comply with the newly imposed rule.
“If reinstated, the payday lending rule will be a rather onerous one for those in the small dollar lending space to comply with,” said the partner.
On the other side of the equation, borrowers will also be heavily impaired by the revived rule, sources said.
“First, the sad reality of a payday borrower is that they generally do not have the realistic ability to repay — they are typically in a precarious immediate financial situation and are forced to make a personal choice to take a payday loan and avoid an imminent financial result at the expense of a longer-term financial obligation,” said Joseph Lynyak III, a partner at Dorsey & White.
Lynyak’s expertise includes regulatory reform, Dodd-Frank and the CFPB. “Imposing an ability to repay rule in this space will only foreclose the only avenue a borrower may have to prevent or delay a near-term disaster,” he added.
Rather than stifling 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 substitutes to payday loans, so the borrowers do not lose a potentially valuable source of consolidating and managing their debt. Many of these institutions have experience doing business in the payday lending or subprime space in the past, but were forced to exit by regulators.
“State legislatures have been very effective laboratories for solving the payday loan problem,” added Lynyak. “At a minimum, the CFPB should allow innovative state laws to address and regulate unfair and deceptive payday lending practices.”