Consumer protection agency, Congress balk at payday lending reform

Lerlyn Anderson needed help with unanticipated bills. Because she was between paychecks, the Twin Cities woman turned to a payday lender.

When she couldn't repay the $500 she borrowed on time, what was supposed to be a two-week loan turned into a months-long ordeal of taking new loans to pay off old ones and ended up costing more in interest and fees than $500.

"People are getting robbed paying these loans," Anderson said. "You are always playing catch-up because of interest and fees."

The Consumer Financial Protection Bureau (CFPB) announced new rules last year that aimed to make payday lenders do more to ensure that borrowers have the means to pay back their loans on time. But now the CFPB is trying to delay and possibly gut that plan, and Congress recently toyed with killing it altogether.

The rule, laid out in the Federal Register, makes it illegal to make "short-term and longer-term balloon payment loans, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay the loans according to their terms."

Mick Mulvaney, the CFPB interim director appointed by President Donald Trump, announced in January that he would reconsider the rule, delaying its application date of August 2019. Mulvaney also sided with payday lenders who sued CFPB asking a federal judge to delay application of the rule until the suit was decided. The judge denied that request last week.

The Community Financial Services Association (CFSA), payday lending's main trade group, argued in the lawsuit that the rule relied on "unfounded perceptions of harm" and disregarded research that showed payday loans improved the financial circumstances of borrowers in comparison to alternatives.

Trump's nominee to permanently direct CFPB, Kathy Kraninger, was one of Mulvaney's lieutenants at the Office of Management and Budget. Critics say she will reflect Mulvaney's hands-off views on payday lending.

The reasoning behind the payday rule is laid out in a Pew Charitable Trust study of short-term lending. The nonprofit organization's study found that each year, roughly 12 million Americans seek short-term loans averaging $375, on which they pay an average interest of $520. These loans are advertised as two weeks in duration, but Pew showed that on average, they take five months to pay off.

Minnesota's federal delegation is split mostly on party lines on the rule. Democratic Sens. Amy Klobuchar and Tina Smith oppose any CFPB efforts to delay or weaken the rule. Klobuchar says the rule guards against "predatory lending." Smith said payday lenders force "Minnesota's most vulnerable residents into endless cycles of debt."

Republican Rep. Tom Emmer branded the payday lending rule a "ruinous one-size-fits-all" regulation backed by "false rhetoric."

"Like so many others issued by the CFPB, [the rule] would do more to harm the very consumers it proclaims to help," Emmer said.

The payday lending rule has attracted opposition from only a few House Democrats, including Rep. Collin Peterson of Minnesota. His office did not respond to a request for comment.

The CFSA has battled the CFPB rule. The trade group says the rule "will effectively remove small-dollar loans as a credit option and provide no financial alternative to the tens of millions of Americans who use this form of credit."

Despite the industry's long lobbying campaign, the rule was not truly threatened until CFPB's founding director, Richard Cordray, resigned in November 2017 and Trump named Mulvaney, a conservative congressman who had criticized what he considered CFPB's regulatory overreach, as interim director.

Mulvaney, who recently disbanded the bureau's Consumer Advisory Board and has dropped some lawsuits against payday lenders, reopened the rule-making process to "reconsider" — and possibly reject — the payday lending rule.

Reopening the rule-making also gives payday lenders another chance to convince the bureau's new leadership that the rule is an unnecessary burden imposed by overzealous regulators.

A legislative risk also exists. House and Senate resolutions that would have killed the rule missed a May 16 voting deadline, but new House bills could provide payday lenders with a way to avoid state laws capping interest rates on short-term loans by letting nonbank lenders affiliate with national banks, whose interest rates are not capped.

Sara Nelson-Pallmeyer sees the toll of high payday loan interest on low-income people every day. Since 2015, she has spent her days in a small office rescuing borrowers from the debt cycle of payday lenders. Nelson-Pallmeyer is CEO of Exodus Lending, a Minnesota nonprofit that makes interest-free loans borrowers use to satisfy payday lenders. The payments Exodus collects go back into a revolving loan pool to help others.

"Exodus started because a payday lender opened on the same block as Holy Trinity Lutheran in south Minneapolis," Nelson-Pallmeyer said.

Cobbling together small private philanthropic grants, as well as $50,000 a year from the state, Exodus has helped 164 people escape an industry that Nelson-Pallmeyer says exploits working-class borrowers. Anderson was among those who got money to buy her way out of the debt cycle.

"Exodus set up monthly payments with no interest," Anderson said. "My prayers were answered."

Nelson-Pallmeyer recognizes the need for an institutional system of short-term, affordable loans designed to help people as much as it enriches lenders. As solutions, she points to interest rate caps, the ability to make partial payments, and limits on the number of times lenders can require borrowers to take out new loans to pay off old ones.

"People do need cash on a quick basis," she said. "Life happens. It could be a medical expense. It could be the loss of a job. A car breaks down."

Meanwhile, the willingness of Congress or the CFPB to restrict payday lending practices remains doubtful, most observers believe. As those in the federal government balk, states have taken action.

In 2016, South Dakota passed a statewide initiative to cap interest rates on payday loans at 36 percent.

Minnesota sets rate limits based on the size of loans and classification of lenders. The state Commerce Department also licenses lenders.

Nevertheless, the lack of a national consumer-friendly policy strikes consumers like Anderson as misguided. Like Nelson-Pallmeyer, Anderson wants a system for short-term loans. But one with no safeguards will not serve those who need it most, she said.

Payday lenders, she said, "know people are desperate and need to get help at any expense."