Keeping track of the legal status of short-term loans in the United States – which encompasses financial products such as payday loans, pawn shops, and title loans – has become a kind of game of “following the bouncing ball.” ” during the last years. At the state level, all kinds of new laws have been passed to cap interest rates, lengthen loan terms, and more or less limit more or less well-known excesses of a subset of loan services that, fairly often tends to be mentioned in the same breath. like phrases like “predatory business model” and “endless debt cycles”.
But at the federal level, the story has been a bit more complex and winding. The CFPB began discussing reforming the rules governing payday loans and other forms of short-term loans as early as 2012. This “discussion” has turned into several years of meetings, hearings, and demands. Shareholder opinion, resulting in the publication of a set of payday lending rules at the end of 2017, to come into effect in August 2019.
But that date has come and gone, and the new rule has not come into effect. After about a year of hinting that the payday loan rule would likely undergo some renovation once the CFPB was officially under new management, as of January 2019, the CFPB officially hit the pause button and postponed the setting. rules until August 2020.
The delay has been applauded in some segments but heavily criticized in others, especially among Democratic lawmakers. In a hearing before the House Financial Services Committee last month, CFPB Director Kathy Kraninger was challenged by committee chair Maxine Waters for being too lax in her efforts to maintain the agency focused on its legislated mission of protecting consumers from dishonest financial services players. .
“You helped payday lenders by delaying and weakening the Office of Consumer’s rule on wages, small dollars and car titles, which would have put an end to predatory payday lending,” Waters noted.
This situation remains deadlocked for now, and so it looked like federal regulation for short-term non-bank lending was likely to be a side issue until at least the end of 2020. But appearances may be. misleading because a bipartisan effort to cut interest rates that short-term lenders can price quite drastically has recently put payday lending regulation back in the spotlight.
The Fair Credit Act for Veterans and Consumers
Inspired by the Military Loans Act first implemented in 2006, the Fair Credit for Veterans and Consumers Act is designed to place a hard cap on all forms of short-term loans, according to its sponsors. Today, those interest rates often hit triple digits and would not be affected by CFPB payday loan rules. The new bill would seek to reduce that figure to a high of 36 percent.
And the bill, apart from being unusual in the breadth of its reach, also has the rare distinction of being bipartisan in its support. Republican Representative Glenn Grothman of Wisconsin is co-sponsoring the bill in the House with Democratic Representative Jesus “Chuy” Garcia of Illinois. Although the bill was proposed by Senators Sherrod Brown, Jack Reed and Jeff Merkley, all Democrats, the 2006 legislation on which it is based has enjoyed broad bipartisan support.
The change, Rep. Grothman noted, is not so much about politics as it is about the common sense limits placed on an industry that studies have shown can have a negative effect on consumers.
“We once had a bill regarding military personnel and military bases that turned out to be a huge success,” Grothman told CNBC. “If you leave it there, it leaves you with the impression that we have to protect the military, but we will leave [payday lenders] go wild and enjoy everyone.
Will the new law pass?
There have been numerous attempts to create support for federal payday loan laws, most of which have never even been passed. In particular, the question is complicated. Opponents of payday loans tend to view them as vicious debt traps, pointing to industry complaints that a 36% rate cap would bankrupt them all, proof that the business model is designed to rip off customers.
But proponents note that of all the complaints about payday loans, relatively few come from those who actually use them. The CFPB’s three main areas for customer complaints are credit rating agencies, debt collectors and mortgage insurers. Payday lenders and other short-term lenders aren’t even in the top five.
Additionally, for those with a real need for short-term financing, simply eliminating the payday loan model by law does not solve their problem. Costly debt is bad for a consumer, financially speaking, but for someone who loses their job because they can’t afford to have their car repaired on their way to work is a much worse outcome. If Congress hopes to ban payday loans with an interest rate cap that makes the model inapplicable, it seems interesting to ask the question: what will replace payday loans for the clients who use them today? ‘hui?
But this tour de table is also a little different – namely because it actually has bipartisan sponsorship and an advocate in Grothman, indicating some commitment to a more conversational and less adversarial process to set up policies. reasonable laws.
“It’s a shame when people work so hard for their money and then lose it, and get nothing in return other than a high interest rate,” he noted.