House Panel Votes to Block New CFPB Payday Loan Regulations
Payday lenders received a possible lifeline after a house panel voted to block new Consumer Financial Protection Bureau, or CFPB, payday loan regulations. With a 30 to 18 vote, the Appropriations Committee initiated the process of blocking the proposed regulations offered by the agency. According to reports, the House panel believes that the CFPB is overstepping its authority by cracking down on waivers that are designed to keep financial institutions out of court.
When the CFPB proposed regulations against the short-term lending industry, it included a ban against forced arbitration clauses in financial product contracts. The Hill confirms that these types of clauses prevent consumers from suing a financial institution or from becoming a part of a class-action lawsuit against lending companies. Consumer advocate groups protest these lawsuit prevention tactics while business groups support them.
In 2015, the CFPB completed a study to see how the short-term lending industry operated. According to the agency, its study found that consumers received less compensation from arbitration than they do through litigation. Despite these results, Republicans and several defenders of arbitration stated that the study’s findings were not enough to justify the CFPB’s ban and that action against the industry was not required. Randy Neugebauer, a chairman of the House Financial Services Committee, said, “I have serious doubts that the bureau has met the statutory requirements.”
The CFPB is Required to Regulate Forced Arbitration
The Dodd-Frank Act came with a mandate for the CFPB. This mandate requires the agency to control forced arbitration to protect consumers. Panel Republicans and those representing banks and business groups state that the Bureau’s study of the short-term lending industry fails to prove that removing the arbitration clause follows the guidelines of the Dodd-Frank mandate. Neugebauer claims that the CFPB did not establish a rational connection and that the rule will prevent low-income consumers from getting compensation.
During the debate, consumer advocates and defenders of arbitration argued about the effectiveness of the CFPB’s processes when it comes to helping consumers. A University of Virginia law professor, Jason Johnston, reviewed the study. He pointed out that of those who initiated arbitration, 63 percent received a settlement in just five months. Johnston said, “The evidence that they found does not justify what they did. Also, very little is made of the general data.”
The vice president of the Consumer Banking Association, Dong Hong, also testified against the arbitration ban. According to Hong, in the study, the class-action lawsuits took as long as two years to reach a settlement. In addition, the average amount of compensation was just $32. By sharing these statistics, Hong was able to prove that the study completed by the CFPB showed that consumers are better off when they go through arbitration to settle their cases.
Fighting Back Against the CFPB with a Different Proposal
Mississippi GOP Representative Steve Palazzo put forth a proposal that would require the CFPB to complete additional reports before the regulations take effect. He also included the condition that the agency must establish products that are able to replace payday loans. PBS reports that Palazzo added his proposal to a spending bill that has authority over the CFPB. However, this means that the amendment is under the threat of a veto.
According to Palazzo, the new regulations against the payday loan industry will restrict lending. In particular, rural districts like his in southern Mississippi would be in trouble because people would be forced to borrow money from loan sharks. Without access to credit, small businesses may close down. People could even lose their jobs or wind up living on the street.
Coming Out Against the Amendment
Democrats mainly came out against amending the rules. They claimed that the change would provide protection for the short-term loan industry at the expense of borrowers. Democrats also argued that these borrowers are at risk of becoming ensnared in a debt spiral that could cause them to lose their cars or other collateral that they put up to secure a loan. Jose Serrano, Representative for New York, said, “Any proposal that would interfere with the CFPB’s ability to act on payday lending would be extremely damaging to the public interest and to millions of working families.”
Building Up to a New Battle
After voting to block the new CFPB regulations, the Appropriations Committee made it clear that it intends to support the short-term loan industry. Since democrats back the CFPB’s proposals, a new battle may be on the horizon. To learn more about the rules for the short-term loan industry, visit the PersonalMoneyStore.com.