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    January 06, 2023 HUMAN RIGHTS

    Curbing Predatory Lending

    by James J. Pierson
    Usury is a serious sin: it kills life, tramples on the dignity of people, is a vehicle for corruption and hampers the common good. It also weakens the social and economic foundations of a country.

    Pope Francis

    Address to Members of the National Council of Anti-Usury Foundation, February 3, 2018

    The recognition of the evils of usury goes back thousands of years when it was initially considered wrong for moral and religious reasons by ancient Christian, Jewish, and Islamic societies. We generally define predatory lending as “the practice of lending money to a borrower by use of aggressive, deceptive, fraudulent or discriminatory means” (Merriam.com Legal Dictionary). The harsh practices fall heavily on our most vulnerable consumers: communities of color, veterans, students, senior citizens, and the working poor. It is nonpartisan in its impact on victims.

    The volume of activity and creativity of predatory lenders to obscure, outflank, and attack basic consumer protection laws continues today. It aligns with almost 200 years ago when the U.S. Supreme Court noted in De Wolf v. Johnson (1825) that “Usury is a mortal taint wherever it exists, and no subterfuge shall be permitted to conceal it from the eye of the law: this is the substance of all the cases, and they only vary as they follow the detours through which they have had to pursue the money lender.” 

    The volume of activity and creativity of predatory lenders to obscure, outflank, and attack basic consumer protection laws continues today.

    The volume of activity and creativity of predatory lenders to obscure, outflank, and attack basic consumer protection laws continues today.

    FRESHIDEA ON ADOBE STOCK

    CFPB Authority and Predatory Industry Challenges

    Payday lenders continue to prey on desperate consumers in a traditional fashion. The Center for Responsible Lending (CRL) notes that payday lenders will often describe the cost of their loans based on terms of fees or simple interest rates. They avoid using an Annual Percentage Rate (APR) as required by the Truth in Lending Act (TILA). Term lengths of the loans are typically 14 days, but borrowers reborrow multiple times before their loans are paid in full, and payments are automatically deducted from borrowers’ bank accounts. The result is 75 percent of payday lending revenue comes from borrowers with 10 or more loans per year (CRL, “Why APR Matters,” March 2022). A CRL map of payday APR loan rates by state, calculated on a $300 loan, reflects 17 states and the District of Columbia with rates around 36 percent or lower, 7 states with some protections, and 26 states that still foster payday loan debt traps.

    The Consumer Financial Protection Bureau (CFPB) issued a payday lending rule in 2017 under its authority prohibiting unfair, deceptive, or abusive acts or practices (UDAAP) that contained “ability-to-repay” underwriting requirements without additional borrowing, as well as provisions on vehicle-title lending and other forms of short-term credit. It also had “payment provisions” that limited a lender’s ability to obtain loan repayments through a preauthorized account.

    The CFPB withdrew its ability to repay underwriting requirements in July 2020 after fierce opposition from the industry, and changing CFPB leadership, but retained its Payment Provisions. Payday lenders have engaged in protracted litigation, and, recently, in Community Financial Services Association of America v. CFPB (Oct. 2022), a three-judge panel for the U.S. Court of Appeals for the Fifth Circuit held that the CFPB’s funding scheme was unconstitutional based on a finding that Congress ceded its appropriation powers and thus violated the Constitution’s structural separation of powers. Applying the linear nexus rule from Collins v. Yellen (2021), the Fifth Circuit then held that the Payday Lending Rule, which notably otherwise passed legal muster as within the CFPB’s UDAAP authority regarding the Payment Provisions, was unconstitutional due to the linear nexus between the funding mechanism and the challenged action. The CFPB is expected to appeal this ruling.

    Despite the withdrawal of the ability to repay provisions in the current rule, it should be noted that the ability to repay is a central tenet in consumer protection to protect against predatory lending. Ability to repay underwriting provisions can be found under TILA (Regulation Z) regarding mortgage lenders to make a reasonable, good-faith effort to assess the consumer’s ability to repay, as well as for credit card issuers to open or increase a consumer’s credit card plan.

    Interest Rate Cap Proposals and Advances

    Legislators and consumer advocates have tirelessly advanced a federal interest rate cap that would expand the protections under the Military Lending Act (MLA) (2006) to rein in predatory lenders. The MLA, deemed a bipartisan success, applies only to active-duty members and their dependents, imposes a 36 percent rate cap, requires the APR calculation to include credit insurance charges and other add-on charges (all-in), and does not preempt any provision of state law that provides greater protection to consumers. The Veterans and Consumers Fair Credit Act, which was reintroduced in the 117th Congress, would expand the protections of the MLA to all veterans and consumers (Senate Bill S. 2508 and companion bill H.R. 5974).

    The National Consumer Law Center (NCLC) report Why Cap Interest Rates at 36%? notes that the genesis of rate caps goes back to the early twentieth century and the Russell Sage Foundation’s promotion of uniform small loan laws. It has evolved and is consistent with typical credit cards capped at below 36 percent, various state laws, the MLA, and CFPB rules on overdrafts and nonsufficient funds on loans over 36 percent.

    In Illinois, the Woodstock Institute conducted a recent poll that found 86 percent of respondents supported a recently enacted rate cap. A January 2020 poll by Morning Consult on behalf of the CRL found a similar result, with 70 percent of voters supporting a 36 percent rate cap on payday and consumer installment loans on a bipartisan basis. When voters oppose a 36 percent interest rate cap on payday loans, three in five (61 percent) do so because they believe that 36 percent annual interest is too high and a rate cap should be much lower.

    In the recent synopsis of Predatory Installment Lending in the States (2022) by NCLC, the report highlights recent rate cap changes and other improvements (and setbacks) that include, among others, Illinois’s 36 percent rate cap (2021), North Dakota’s 36 percent APR cap on all non-bank loans in the state (previously, no cap over $1,000), and New Mexico’s reduction of its APR cap from 175 percent to 36 percent plus a fee of 5 percent on loans of $500 or less. In May 2022, Louisiana Governor John Bel Edwards vetoed a bill providing an almost 300 percent APR on a $500 six-month loan. Setbacks for consumers were noted in Oklahoma (added junk fee), Mississippi (extending sunset date of its Credit Availability Act, deemed a harm to consumers), Wyoming (repealing protections previously applied at the high end of rates it allows), and Hawaii (repealing its payday loan law, but replacing it with a new law that greatly increases the allowable APR on installment loans up to $1,500).

    Fintech and Future Challenges

    The CFPB issued a Request for Comment in early 2022 on Buy Now Pay Later (BNPL). Seventy-seven consumer, civil rights, legal services, faith, and other organizations collectively provided commentary. The response noted the market for BNPL has increased dramatically with roughly one-third of U.S. adults saying that they have used BNPL, and the industry is expected to further increase 10 to 15 times its current size by 2025.

    The CFPB notes that a typical BNPL transaction allows a consumer to purchase a product ($50 to $1,000 range) at retail with four equal installments, an initial 25 percent payment at the date of purchase, and the remaining three payments in two-week intervals over six weeks. The payments are interest-free, but late payment penalties apply depending on the BNPL lender.

    The risks to consumers noted in the public advocate response letter include: (1) assessing a borrower’s ability to repay; (2) multiple fees from the BNPL provider and bank account overdraft fees; (3) limited access to refund or redress; (4) lack of adequate disclosure; (5) disparate impact, as BNPLs are disproportionately used by Black and Hispanic Americans; (6) consumers lack of knowledge of BNPL credit, and (7) debt collection issues.

    This was further emphasized in a recent full hearing of the U.S. Senate Committee on Banking, Housing and Urban Affairs, New Consumer Financial Products and the Impacts to Workers. Rachel Gittleman testified for the Consumer Federation of America on emerging forms of credit: BNPL, Earned Wage Access (EWA), and Training Repayment Agreement Provisions (TRAPs), among others. As noted in her testimony, “at their core, each of the products and provisions discussed today should be covered by basic consumer protections at the state and federal level, including interest rate limits, underwriting for ability-to-repay, cost transparency, dispute rights, and fair lending laws.”

    EWA products allow employees to take out an advance ahead of payday for wages they have earned but have not yet been paid, with repayment in various forms. It is noted that they have a similar structure as a payday loan at a reduced cost. But repeat usage is common, with the average user utilizing an EWA twice per month, and another survey found that 70 percent of EWA users took out consecutive advances. In rescinding a recent advisory opinion order on EWA, the CFPB noted it planned to “provide greater clarity concerning the application of the definition of ‘credit’ under TILA and Regulation Z.”

    TRAPs are a form of employer debt that requires employees to pay back their employers for on-the-job training costs if they leave voluntarily or involuntarily before some predetermined date provided by the employers. The Student Borrower Protection Center estimates that companies that collectively employ more than one in three private-sector workers use TRAPs in employee contracts.

    Conclusion

    Predatory lenders prey on our most vulnerable consumers. Traditional predatory products are being heavily marketed, and harmful changes for consumers continue to be aggressively lobbied by state legislatures. New products are rapidly emerging through fintech innovations, and the substance of these new transactions as credit is not clear to consumers. This is a challenge that legislators, regulators, and consumer protection advocates must overcome to ensure a level playing field where transactions that are inherently credit are accurately defined and are held accountable with fair pricing, responsible underwriting, transparency, and fair lending. It is a responsibility we must all share and undertake to advance economic justice through consumer protection. 

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    James J. Pierson

    Co-Chair, ABA Section of Civil Rights and Social Justice Economic Justice Committee; Dean, College of Business, Misericordia University

    James J. Pierson is dean of the College of Business at Misericordia University. He also currently serves as a co-chair of the ABA Section of Civil Rights and Social Justice Economic Justice Committee.