Under current leadership, the federal Consumer Financial Protection Bureau (Bureau) seems committed to only grudgingly protecting consumers from unfair and exploitative financial products.  In its strategic plan, former Acting Director Mick Mulvaney explained that the Bureau had “committed to fulfill the Bureau’s statutory responsibilities, but go no further.”  This language aligns with Mulvaney’s earlier change to the Bureau’s mission statement, identifying the CFPB’s mission as, among other things, to help “consumer finance markets work by regularly identifying and addressing outdated, unnecessary, or unduly burdensome regulations.”

The Bureau’s newly-confirmed new Director, Kathy Kraninger, seems to share Mulvaney’s priorities.  Although she took office pledging that she would not be a mere Mulvaney puppet, her signature initiative thus far appears to be rescinding payday and car title lending protections. Under Kraninger’s leadership, the Bureau has proposed to rescind a rule providing that “it is an unfair and abusive practice” to make certain payday and car title loans, “without reasonably determining that consumers have the ability to repay those loans according to their terms.” As justification for the shift, the Bureau simply announced that it changed its mind about the rule—claiming that the evidence it previously found persuasive was “not sufficiently robust and reliable to support” the Bureau’s underwriting rules.

The Bureau’s opposition to its own rule comes from its newly-discovered doubt in its own key finding that payday and car title borrowers struggled to accurately predict their ability to repay.  In particular, the Bureau now believes that insufficient evidence supported three conclusions:

(1) consumers who use covered short-term or longer-term balloon-payment loans lack the understanding needed to reasonably avoid injury from lenders’ failure to assess consumers’ ability to repay those loans; (2) consumers lack understanding of the material risks, costs, or conditions of such loans; and (3) consumers’ lack of understanding contributes to their inability to protect their interests in the selection or use of such loans.

This goes to the core of the controversy over payday and car title lending. As one scholar explained, the debate centers around whether payday borrowers act rationally “because borrowers need access to credit and lack superior alternatives” or lenders simply exploit “consumers’ systematically poor decision making.”  If many consumers lack sufficient sophistication to protect their own interests, the payday lending industry may earn significant profits by inducing customers to enter into bad deals that hurt their interests.

Of course, not all payday and car title borrowers are alike. Available deals may be good for some borrowers and catastrophic for others.  Consider the common example of the hardworking low-wage worker with a broken-down car.  Even with its high cost, a payday loan may allow her to repair the car and keep working instead of losing her job because she cannot otherwise make it to work. Industry advocates argue that these loans provide access to capital and help (apparently friendless and unable to hitch a ride) working people mitigate harms from cash-flow issues.  

Still, substantial evidence indicates that many borrowers find themselves locked into a debt cycle, borrowing again and again to make payment on existing loans.  The Bureau’s own research from 2016 found that “more than 80 percent of payday loans  . . . were rolled over or reborrowed within 30 days, incurring additional fees with every renewal.”  About 20% of borrowers ultimately default and roughly the same percentage of auto-title borrowers with single-payment loans eventually find their lender seizing their car.  A borrower who loses her car to a lender may suffer a cascade of problems—including losing her job and her ability to ultimate drive herself to any new job.

Broader evidence around payday lending’s overall impact appears mixed.  Some studies show that payday lending helps households and others indicate that payday lending exacerbates many problems. Assessing the research may be especially difficult because of reports that the payday lending industry has exercised significant influence over the research into its lending practices and outcomes for the purpose of creating “research that they can point to in order to argue against regulation.”

The Bureau’s underwriting requirements provided a sensible way to balance appropriate access to short-term loans against the disastrous consequences for consumers finding themselves in a debt trap. By making a lender assess a borrower’s ability to repay at the time it issued the loan, the Bureau’s regulation aimed to facilitate responsible lending and protect consumers.  Although the regulation would have restricted some lending activity, it would also address some of the worst risks facing consumers.

In seeking to rescind the underwriting requirements, Kraninger’s Bureau balances priorities differently.  It aims to protect lender business and customers’ freedom to take on debts they cannot plausibly repay over the risk that borrowers will continue to fall into debt traps.  

Ultimately, rescinding the underwriting rules shifts the responsibility for consumer protection to the consumers themselves and the States.  On the consumer front, the Bureau essentially tells consumers to get better at making financial decisions and signals support for “improved financial education programs” as “a viable alternative to more direct market interventions such as issuing regulations.”  This suggestion ignores the substantial research documenting that financial literacy education does little to improve consumer decision-making.  

The Bureau’s move to unwind restrictions signals the need for States to exercise their authority to regulate payday lending.  In proposing to unwind the Bureau’s underwriting requirement, it explained that it viewed the original rule as improperly “reducing credit access and competition in the States which have determined it is in their citizens’ interest to be able to use such products, subject to State-law limitations.”  This justification implicitly rebukes States that thought it best to allow a federal consumer protection agency to set standards and avoid subjecting lenders to both state and federal regulation. States that stood down on their regulatory efforts in deference to the Bureau’s extensive initial rule-making process now find their deference betrayed and used as an excuse to avoid any action.

States should not expect significant action from the Bureau in the near term.  After Kraninger’s 50-49 confirmation vote, she enjoys a five year term—allowing her to protect Americans’ longstanding freedom to be fleeced by bad deals for years to come.  At the least there are some early signs that States may soon take action to protect their citizens despite the federal flight from the field.  For example, Nevada has two pieces of legislation pending to address payday lending problems. Senator Cancela’s Bill proposes to, among other things, fund the creation of a database to track payday lending activity in Nevada.  The measure would likely make state regulators more effective in overseeing Nevada’s lenders.  Another Bill, introduced by Assemblywoman Swank, proposes to simply cap interest rates at 36 percent, the same rate used in the Military Lending Act. If enacted, Swank’s legislation would add Nevada to the list of States with rate caps on payday loans.  In considering how to proceed to best protect their citizens, States should no longer defer to the federal Bureau charged with responsibility for protecting consumers.

Benjamin Edwards is a professor at William S. Boyd School of Law at UNLV. He researches and writes about business and securities law, corporate governance, arbitration, and consumer protection. Prior to teaching, Professor Edwards practiced as a securities litigator in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP. At Skadden, he represented clients in complex civil litigation, including securities class actions arising out of the Madoff Ponzi scheme and litigation arising out of the 2008 financial crisis.

Suggested citation: Benjamin Edwards, State Leadership Needed on Consumer Protection Issues, JURIST – Academic Commentary, Feb. 25, 2019, http://jurist.org/forum/2019/02/edwards-state-leadership/

This article was prepared for publication by Brianna Bell, a JURIST Staff Editor. Please direct any questions or comments to her at commentary@jurist.org