CFPB’s War on Payday Loans Appears Doomed For Defeat
Payday loans, Despite intense publicity over the past few years, payday loans might be here to stay despite 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.
The CFPB and director Richard Cordray immediately began drafting rules and guidelines to regulate the payday 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 payday 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 loans and alternative lending platforms.
Although Trump hasn’t specifically endorsed the payday advance loans, he generally supports deregulating financial institutions and providing relief for small business owners who struggle with expensive and complex regulations.
Payday Loans Might Have Less Opposition in the Future if Trump Overturns Dodd-Frank
Payday 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.”
Fast 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.
Fast Payday Loans Might Revert to Existing Federal and State Legislation
The future of proposed CFPB regulations of the financial industry remains uncertain. Fast payday loans, 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 payday loans have opposed the high interest rates of fast payday loans and the fact that many people take out fast payday 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 fast payday loans–trap some people in debt because borrowers don’t always make the wisest decisions about their ability to repay loans. 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 payday 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 payday 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.