Proposed CFPB Regulatory Changes in Payday Industry Drawing Fire

Proposed CFPB Regulatory Changes in Payday Industry Drawing Fire

Legislators established the Consumer Financial Protection Bureau, or CFPB, to protect borrowers from unfair lending practices put in place by financial institutions. However, the proposed CFPB regulatory changes in the payday industry is drawing fire. Critics claim that the proposals will end up harming low-income individuals as well as minorities since these loans are the only ones that are available to many of them.

Proposed CFPB Regulatory Changes in Payday Industry Drawing Fire

Industry insiders and those who advocate for financial protections are calling for changes to the CFPB’s proposed regulations. According to the official CFPB website, the changes require lenders to confirm a borrower’s ability to repay a loan as well as cover monthly expenses like rent and utility bills. Under the new legislation, there would be a limit on repeat loans. Lenders would also be obligated to verify a borrower’s credit score.

Jamie Smith, a pawnshop owner, said, “The cost to comply with those regulations would simply be too high.” Moderate estimates show that 60 percent of payday loan stores would shut down nationwide with the CFPB’s regulations in effect. Small stores are at the most risk while larger corporations are likely to find ways around the rules.

Mounting a Challenge Against the CFPB’s Regulatory Proposals

Because the payday lending proposals are likely to shutter a number of short-term lending companies, there will probably be a legal challenge to the regulations. Since the courts take cases involving bankruptcies seriously, they are likely to consider a legal challenge from the industry.

The New York Times reports that this is a good and bad news situation for payday loan lenders. The good news is that the courts will take the short-term loan industry seriously. The bad news is that these claims are likely to fail. Payday lenders who are considering legal action report that they will contest the CFPB’s authority to issue such a rule. These businesses will also challenge the cost-benefit analysis that supports the regulations and the constitutionality of the agency’s right to exist.

There’s a New Sheriff in Town

If the payday loan industry fails in its legal efforts to fight back against the CFPB, it will be clear that there is a new sheriff in town, one that is a powerful financial regulator with the ability to impact not only banks, but also any source of credit. This includes credit card companies, credit unions and payday loan lenders. In fact, the agency’s power extends to any formal or informal way that people acquire money.

One sticking point may be the CFPB’s lack of industry to regulate. For instance, the Federal Reserve is in charge of banks while the Federal Communications Commission oversees telephone companies. However, the CFPB is a general regulatory body that is not assigned to any particular industry. Payday lenders could legally argue against the agency’s action toward part of its business practices and not others.

Regulation of Unfair, Deceptive or Abusive Lending Practices

The CFPB’s governing decree is to regulate deceptive, unfair or abusive lending practices. According to the agency, when short-term loans are issued without the lender taking steps to prevent abuse, they are engaging in improper lending practices. If the courts agree with the agency, then the CFPB will gain confidence in its ability to regulate the short-term lending industry. The court will also confirm its acceptance that the CFPB regulates the practice of lending and that it does so for any type of lender.

The Wall Street Journal confirms that once the regulations go into effect, consumers will have a new way to sue banks. The rule giving consumers this ability is the one that limits the inclusion of arbitration clauses in financial contracts. This shifts more power into the hands of consumers when they are dealing with lenders. Instead of being blocked by mandatory arbitration clauses, consumers can instigate class action lawsuits. However, the regulation continues to allow financial institutions to force individuals to settle their disputes through arbitration.

Does the CFPB Have Unfettered Authority to Act?

Critics are firing back at the CFPB for the regulatory changes that it’s proposing. Because the CFPB has the power to regulate the way that lenders provide financial services to borrowers, the agency is not accountable to the president or Congress. This allows the CFPB to operate unfettered. While this factor gives the agency power to act, it may also give the short-term loan industry a shot at winning a lawsuit. To learn more about the agency’s proposed regulations against the payday loan industry, head to the

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