Why Payday Loans are Here to Stay
Despite intense publicity over the past few years, payday loans are here to stay regardless of the opposition of consumer groups and the Consumer Financial Protection Bureau. The agency was created by the Dodd-Frank Act to regulate the financial industry after the excesses of Wall Street and the banking industry led to the 2008 financial crisis.
Payday Loans Under Regulatory Attack
The CFPB and director Richard Cordray immediately began drafting rules and guidelines to regulate the paydayloan lending industry and other financial products by capping interest rates and implementing other consumer protection measures. Trump hopes to abolish the agency and end its war on financial institutions offering pay day loans.
President Trump, while campaigning for the presidency, promised to abolish or scale back the CFPB and its burdensome regulations. In early February, Trump made good on his promises by signing an executive order outlining his administration’s strategy to spur economic growth. According to a report posted at Forbes.com, Trump’s executive order establishes the groundwork for replacing Dodd-Frank, eliminating the CFPB or curbing its unilateral power to craft financial legislation and outlining the administration’s broad financial goals.
The CFPB has been extremely controversial. Critics suggest that the agency has exceeded its mandate by establishing a host of regulatory requirements that impede economic development. Republicans and the Trump Administration favor a market approach instead of excessively regulating bank loan products, payday advance loans and alternative lending platforms.
Although Trump hasn’t specifically endorsed payday lenders, he generally supports deregulating financial institutions and providing relief for small business owners who struggle with expensive and complex regulations.
Payday Advances Might Have Less Opposition if Trump Overturns Dodd-Frank
Payday advance loans are viewed by the Trump Administration as relatively minor business interests that don’t require government regulation. Rolling back Dodd-Frank won’t affect the government’s regulations of the major banks, but Trump also plans to reduce regulations for small-to-medium-sized banks.
Trump’s White House National Economic Council Director Gary Cohn commented, “We have the best, most highly capitalized banks in the world, and we should use that to our competitive advantage. But on the flip side, we also have the most highly regulated, overburdened banks in the world.” But Payday loans are just one of the areas that the CFPB regulates.
Banks are lobbying the new administration for a rollback of oversight requirements for smaller lending institutions. Currently, banks with more than $10 billion in assets are subject to increased oversight. Banks with $50 billion or more in assets can be designated as “important financial institutions” and be subject to the Federal Reserve’s examinations and “stress tests” that gauge liquidity in the event of a financial crisis that could lead to a “run” on the bank. Trump hopes to limit these tests to banks with $250 billion or more in assets.
According to Cnbc.com, Trump’s order would establish a 120-day review of Dodd-Frank and the CFPB and delay a CFPB rule that would require that financial advisors only provide their clients with advice that is clearly in their best fiduciary interests. The order would also focus attention on several key administration goals that include:
- Replacing Richard Cordray
- Leaving regulations of payday loans and other financial products to the states
- Preventing bailouts from taxpayer money
- Reforming Fannie Mae and Freddie Mac
Trump can also take further control of the economy through some key appointments. Federal Reserve Chair Janet Yellen’s term expires in 2018, and the term of Thomas Curry, the Comptroller of the Currency, expires in April of 2017. Democrats vow to oppose deregulation, but Trump will likely receive bipartisan support for reducing regulations of small- and medium-sized banks.
Pay Day Loans Might Revert to Existing Federal and State Legislation
The future of proposed CFPB pay day loan regulations of the financial industry remains uncertain. Payday loans for bad credit, which have been among the top regulatory targets of the CFPB, face a number of new regulations that were ostensibly designed to fight predatory lending practices.
Critics of pay day loans have opposed the high interest rates and the fact that many people take out short term payday advance loans several times–often to pay living expenses after repaying loan charges that they couldn’t really afford–which traps them in cycles of debt.
All loans–including pay day loans–trap some people in debt because borrowers don’t always make the wisest decisions about their ability to repay payday loans with bad credit. Access to credit can also encourage people to spend beyond their means. However, President Trump believes that deregulation of the financial industry stimulates the economy and eventually raises standards of living by putting more disposable income into family budgets. Given a healthy economy, consumers should have access to credit at competitive rates.
Supporters of pay day loans have suggested that CFPB rules could wipe them out and that the organization’s structure is unconstitutional because it concentrates too much power in a single agency and director. CFPB director Richard Cordray has the power to recommend regulations without oversight and the usual checks and balances of the legislative process.
Cordray’s term runs until 2018, but many people expect him to step down in the face of Trump’s opposition to the agency. If Cordray resigns, Trump could appoint someone who shares his political views, and most likely, a committee would be appointed to oversee the agency’s decisions.
Laws Limiting Payday Advance Loans: Are They Supported by Populist Voters?
Payday advance loans–which have been getting lots of media and political scrutiny–remain popular with consumers with bad credit and those with minimal savings and resources. Advocates for the CFPB and stricter regulation of payday advance loans suggest that President Trump’s populist message fails to match his actions because he supports big business and doesn’t protect low-income people from predatory lending practices according to an article posted at Washingtonexaminer.com.
Americans for Financial Reform Associate Director Gynnie Robnett commented on Trump’s disconnect with populist voters: “You just won … on a message of economic populism, and here you are then going after a rule that is specifically designed to un-rig the system?” Lauren Saunders of the National Consumer Law Center pointed out that Trump won South Dakota with 61 percent of the vote but that 75 percent of South Dakota voters elected to cap interest rates for payday advance loans at 36 percent.
Elizabeth Warren, the CFPB’s Driving Force, Responds to Trump’s Executive Action
Elizabeth Warren, according to the Cnbc report, leads the Democratic opposition to Trump’s proposals on pay loans and financial deregulation in the U.S. Congress. Warren has criticized the cozy relationship that Trump enjoys with executives of JPMorgan Chase and other banks and Wall Street firms. Warren commented, “Donald Trump talked a big game about Wall Street during his campaign–but as president, we’re finding out whose side he’s really on.”
Warren led the campaign for the Dodd-Frank Act and the creation of the CFPB. Many expected Warren to be named as the agency’s first director, but political opposition to Warren was strong, so Obama selected someone who was–at the time–less controversial.
Payday Loans Given New Lease by Pending Regulatory Reforms
With Donald Trump in the White House, payday loans could be given a new lease on life by pending regulatory reforms. The game has changed regarding regulations in a number of sectors. At the start of his presidency, Trump announced that he would do a “big number on Dodd Frank.” This was the policy change that brought sweeping legislation to the financial industry.
President Obama called for it following the 2008 financial crisis, and it was finally passed in 2010. Along with enacting regulations against the traditional banking industry, legislation is also impacting alternative payday loan lenders.
Regulatory Reforms to Breathe New Life into Payday Loans
During one of his many speeches, Trump referred to Dodd Frank as “a disaster”; with this news, organizations that provide easy payday loans are surely experiencing relief. He has also claimed that the banking act is responsible for impeding growth because it makes it tougher for financial institutions to lend to small businesses and everyday consumers. Despite the president’s claims, new businesses in the country have grown steadily since 2010.
Forbes reports that Trump signed an executive order designed to cut back on the Dodd Frank Act dramatically. He said, “Today we are signing core principles for regulating the United States financial system.” Trump also said that he planned “to be cutting a lot out of Dodd Frank.”
So, What Did Trump Include in the Executive Order that Targets Dodd Frank?
Giving payday loan lenders reason to rejoice, Trump’s executive order targeting Dodd Frank lays groundwork that could lead to the act’s replacement. The executive order features broad principles designed to support economic growth. It also seeks to reduce federal regulations by requiring agencies to eliminate two current regulations for every new policy change introduced. In addition, the order places an annual cap on how much new regulations can cost.
Reuters reports that for the remainder of 2017, the cap requires lawmakers to offset the cost of creating more regulations by undoing current ones. This could help institutions that offer bad credit payday loans since legislators may decide against creating more rules for the industry.
Consumer groups are protesting the president’s intention to dial back regulations, contending that Trump’s executive orders will remove important public protections. In most cases, the White House’s Office of Management and Budget, or OMB, reviews major regulations. This process will continue under the new policy changes. However, some regulatory categories will be untouchable. For instance, legislation that deals with national security and the military will be exempt.
Jody Freeman, a Harvard Law School professor, pointed out that the new directive was “entirely unnecessary” due to similar regulatory action taken by past presidents. She said, “Even if it is fairly toothless in the end, it will be a weapon the OMB can use to harass agencies and slow regulation.” This may work to the benefit of those who offer bad credit payday loans.
An Attempt to Make Payday Loans a Thing of the Past
By establishing the Consumer Financial Protection Bureau, or CFPB, legislators enacted a regulatory body that potentially had the power to make payday loans a thing of the past. The Trump administration has expressed an interest in replacing CFPB leader Richard Cordray. If the president follows through, then this could neutralize the agency.
Would removing Cordray benefit the American people? Maybe, but just a few months ago, the CFPB found that Wells Fargo opened thousands of fraudulent credit card and savings accounts without customer consent. Some of the bank’s employees were fired for speaking out against the deception. The scandal caused the bank’s CEO, John Stumpf, to resign. It also resulted in a mass of regulatory investigations.
The CFPB has also fought against overcharging, engaging in improper foreclosure practices and online payday loans for bad credit that frequently leave the poor saddled with a mountain of debt. However, the Trump administration believes that the CFPB has regulatory overreach, resulting in businesses struggling to grow, including the lenders of payday loans.
Writing Regulations that are Better and More Efficient
Gary Cohn, the Economic Council Director to the White House, insinuated that he and Treasury Secretary Mnchin are ready to make changes to Freddie Mac and Fannie Mae. Cohn said, “I’m not sitting here saying we want to go back to the good old days.” But, he did suggest that the Trump administration would be able to write regulations that are better and more efficient.
He was also confident that looser restrictions would result in a self-regulating market, which is good news for the lenders of bad credit payday loans. The regulations put in place by the CFPB were threatening to crush the payday loan industry, making the Trump presidency a fortunate turn of events for these lenders.
Democrats Plan to Fight the President’s Executive Order
USA Today reports that key democrats are coming out against the president’s executive orders. Senate Minority Leader Charles Schumer said, “The president’s attempts to repeal Wall Street reform will be met with a democratic firewall in Congress.” Party leaders also pointed out that Trump and the Republicans will need to use legislation to make changes to Dodd Frank instead of executive action.
It’s also too early to tell whether the regulatory rollback will actually come to fruition. Even after the financial crisis caused by Wall Street, it took years of fighting to enact Dodd Frank. Along with this, the people called upon to write the reforms will be the current heads of a number of agencies appointed by President Obama. Because of this, changing the rules will likely be a slow going process, so the lenders of payday loans will need to be patient.
Janet Yellen, the Federal Reserve chair, will retain her position for another year. Thomas Curry is the Comptroller of the Currency, and he’ll be at his post until April while Martin Gruenberg, the Federal Deposit Insurance Corporation chair, has until November before his time expires. As far as the CFPB, Cordray has almost 16 months to go. With these people over important financial agencies, Trump’s executive orders are likely to experience a delay.
Is the Trump Presidency a Game Changer for the Lenders of Payday Loans?
With the Trump administration vowing to temper the Dodd Frank Act and the CFPB, bad credit payday loans seem to have received a lifeline. This may be good or bad for borrowers. While the CFPB was created to protect borrowers who are the most vulnerable financially, the agency failed to establish other borrowing options for people with bad credit. If lawmakers really want to help those who are at the bottom of the borrowing food chain, then they’ll find ways to inspire banks to lend to folks with bad credit.