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).