For Payday Rules, It’s Déjà Vu

Baseball icon Yogi Berra supposedly once said, “It’s déjà vu all over again.”

It’s not clear what Berra might have been talking about or if he really said it.

But these days, it could apply to regulation of payday loans.

In 2017, under former Director Richard Cordray, the CFPB issued strict rules governing the short-term lending procedures.

But when Kathy Kraninger took over the agency, the Trump Administration appointee proposed revoking a key part of the rule – the requirement that a borrower demonstrate an ability to repay the loan.

And she proposed delaying the underwriting portion for an additional 15 months, to Nov. 19, 2020.

Meanwhile, under the original Cordray rule, the agency gave credit unions that used the NCUA’s Payday Alternative Loan model a safe harbor.

But then, the credit union regulator began discussions about another payday alternative program, although no final rules have been issued yet.

Credit union officials contend that places them in a particularly thorny position. If the CFPB rules are finalized before the NCUA issues rules governing a new PAL offering, the rules might conflict. And the new loan model might not get a free pass from the CFPB.

Without a safe harbor for all PAL loans, more credit unions might not be convinced to begin offering short-term loans to their members.

“If the payday rule compliance date is delayed, it will allow time for the bureau to expand the safe harbor exemption to include all future versions of Payday Alternative Loans finalized by the NCUA,” Kari Osier, a compliance specialist with the Illinois Credit Union League, told the CFPB in urging the agency to delay its rule. “However, if the NCUA’s proposed June 2018 rulemaking is finalized before the current date for payday rule compliance, only PALs I will be a part of the safe harbor exemption.”

Many credit unions have chosen not to enter the payday lending business, according to Michael Lee, director of regulatory advocacy at the League of Southeastern Credit Unions.

“Credit unions have not entered the payday lending space in large numbers, though they do offer many competing products and services,” Lee told the CFPB in a letter. “So, if there is a desire for credit unions to enter this space and provide a better alternative to payday loans with the PAL product, certainty within the regulatory landscape is necessary.”

Credit unions contended they should not be lumped together with traditional payday lenders, many of whom charge high interest rates and attempt to place borrowers into a cycle of debt.

“We fully support the fight against unscrupulous payday lenders and vehicle title lenders, and we will oppose changes that would allow them to continue preying on the poorest of Americans; however, the rule in its current form unfairly lumps in pro-consumer credit unions with predatory storefront payday and vehicle title lenders,” Paul Guttormsson, vice president of legal and compliance at the Wisconsin Credit Union League, wrote in urging the agency to delay the mandatory underwriting provisions of the rule.

Credit unions have found an ally in the Small Business Administration’s Office of Advocacy. That office raised issues about the Cordray payday lending rule and SBA advocacy officials have endorsed the delay proposed by Kraninger.

“A fifteen-month delay would allow ample time for the CFPB to review (the) NCUA’s changes to the PALs, and to identify inconsistencies and resolve problems that were not considered in 2017,” SBA officials wrote.

However, in deciding whether to delay or rescind parts of the Cordray rule, CFPB officials face the possibility of being sued by Democratic state attorneys general.

The attorneys general said, in a letter to the agency, that they “vigorously oppose (the) CFPB’s proposal to delay the compliance date – as well as its proposal to altogether rescind the Underwriting Protections … and we will not hesitate to consider taking legal action if (the) CFPB unlawfully proceeds.”

The state attorneys general said research into the need for the Cordray rule was meticulously documented and the mere fact that the agency’s leadership has changed is not an adequate reason under federal law to delay or rescind the rule.

They said the research demonstrated that while the payday lending industry would bear the cost of implementing the new rule, the benefits to consumers outweighed those costs.

And they said the August 2019 effective date gave lenders adequate time to comply with the 2017 rule.

The state officials said they are particularly concerned because they share the CFPB’s responsibility to enforce the rule.

“The delay in the Underwriting Protections will leave the citizens of our states unprotected from many types of exploitative loans and could embolden lenders who would seek to circumvent the laws of those states with strong protections against such loans,” they said.

The payday lending industry has endorsed the delay and in fact has been pushing the CFPB to rescind the rule altogether.

The Consumer Financial Services Association of America has sued the CFPB, contending, among other things, that the research upon which the rule was based was fatally flawed.

And the CEO of the organization told the CFPB that his industry is already heavily regulated.

“These lenders are already subject to significant and extensive federal, state and industry regulations,” Dennis Shaul told the CFPB.

And he said the compliance date should be extended.

“If the compliance date is not delayed, lenders will expend significant resources and time to comply with a rule that the bureau may ultimately conclude lacked valid justification to begin with,” he wrote.