What’s Happening with the Consumer Financial Protection Bureau?

Last year, the Consumer Financial Protection Bureau (CFPB) pulled the plug on laws aimed to prevent predatory lending practices carried out by payday lenders. However, with a new president in the White House, a Biden administration may spell changes down the pike for these lenders.

The CFPB is an independent financial watchdog that simultaneously writes and enforces federal consumer financial laws. In November of 2017, it tabled the first of its mandatory underwriting provisions which would prohibit how payday loan lenders could underwrite and approve their loans.

These regulations had three primary focuses:

1. They would make it compulsory for lenders to ensure their customers could afford to repay their payday loans before they approved them for funds.

2. They would also limit how many small dollar loans one person could take out at a time.

3. These provisions would prevent lenders from withdrawing funds from an account if they’ve already made two consecutive, failed attempts.

These laws would have affected all the small dollar loans available in the country, from in-person cash-checking services to payday advance loans online, and they were set to come into effect in August 2019.

In the meantime, the CFPB was under severe pressure from the small dollar lending community.

They argued that these changes to their industry would lock many underbanked consumers out of essential financial services. The decision would leave them without options when they have no other way to pay for unexpected bills or repairs.

Without these cash advances, the underbanked would be vulnerable to unexpected expenses when they come up short of what they need to fix their car or see a doctor. The alternative — losing their ability to drive or ignoring their health — could lead to even more financial issues down the line.

They also said their underwriting process protected their business, as they were justified by how many borrowers fail to repay what they owe. Enacting limits on how often they could lend to one customer could land a devastating blow to their industry.

At the same time, the Senate ruled that the president could fire the director of the CFPB at will, allowing the Trump administration to restructure the CFPB — an organization created by Obama — by appointing new officials at the top of the agency.

The change in management led to a huge shift in the way the CFPB enforced laws and handled complaints, resulting in fewer fines levied at financial institutions. By one account, the money returned to consumers fell by roughly 96 percent.

Under new appointments, the CFPB reconsidered their provisions, and by July 2020, it announced it was to rescind two out of the above provisions of their 2017 ruling. It would move forward with its payment rule that would limit how many times a lender could make an attempt to withdraw from one account.

Free from these regulations, payday lenders now don’t have to ensure their customers can repay what they borrow before providing them funds. This puts them at odds with other financial products (including direct lender installment loans) involving a thorough underwriting process, which ensures customers can afford to take on a loan.

While online payday loans may be the only way an underserviced customer can borrow money, they often come with high rates, fees, and other costs that make them an incredibly expensive way to borrow. As a result, borrowers need to ensure they can handle the true cost of borrowing before they take out these loans.

If a consumer can’t pay what they owe on time, the borrower may rollover their payday loan or extend the due date by paying an additional fee. Opponents say that the loss of these regulations means there is no safety net preventing people from falling into debt traps where they’re constantly rolling over a loan.

Today, economic experts call on President Biden to restore the CFPB by appointing the agency a new director, replacing Trump’s choice of Republican Kathy Kraninger. They’re also calling on the Biden administration to reinstate the CFPB as a consumer watchdog, returning its rights to bring predatory financial organizations to task.

Rachel Rodman, a former CFPB lawyer who now represents banks at Cadwalader, Wickerhsam & Taft told Bloomberg reporters to expect big changes in 2021.

“Banks should be prepared for more aggressive enforcement and an expansion of the CFPB’s authority through its rulemakings.”

While there has been no official confirmation yet, all signs point to new changes affecting the way the CFPB operates, and with that, many people believe a crackdown on payday lenders may follow. At the very least, a new CFPB will strike a better balance between allowing low-income people access to funds when they need help and protecting them from predatory lending practices.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes