Mick Mulvaney, the head of the Consumer Financial Protection Bureau, took $31,700 in contributions from payday loan companies in 2016 and is now reviewing rules aimed at protecting consumers from harmful lenders.
Under Mulvaney the bureau will review payday lending rules introduced at the end of the Obama administration that could have significantly curtailed the size of the industry.
The CFPB was set up to protect consumers in the wake of the financial crisis. Ahead of his appointment as acting director Mulvaney called the agency a “sick, sad” joke that was “extraordinarily frightening” and unaccountable.
Payday loans are “small dollar” loans, often in the hundreds of dollars, which carry exorbitant interest rates, and which many consumer debt advocates argue are predatory by nature. According to the Center for Responsible Lending, a North Carolina-based nonprofit, the average payday loan in the US carries a 391% APR. CRL says lenders clear $8bn in fees and interest charges annually.
With lenders strategically located in low-income neighborhoods, the loans are marketed to consumers with little or no savings or credit as a stopgap for unexpected spending between paychecks. Under payday loan contracts, instead of collateral, lenders usually hold a personal check post-dated to the customer’s next payday. Alternatively they may require access to the customer’s checking account, with an agreement to withdraw the owed balance on the next payday.
Customers who can’t meet the obligation on their next payday often wind up trapped in a debt cycle, where penalties and ballooning interest rates make the balance effectively unpayable.
Although the loans theoretically only remain active for one to two weeks, according to CRL the typical payday borrower remains in loan debt for 212 days.
Virtually all of the big players in the industry are owned by private equity firms. Mainstream banks have mostly left the market alone, fearful of bad publicity and the looming threat of consumer protection regulations. The largest chain, Advance America, has 2,100 locations in 28 states, and is owned by the Mexican conglomerate Grupo Salinas.
The bureau has yet to submit a proposal to repeal the rules outright, but the statement opens the door for the bureau to start the process of revising or even repealing the regulations. The bureau also said it would grant waivers to companies as the first sets of regulations going into effect later this year.
During the 2016 election cycle, when Mulvaney was still a congressman from South Carolina running for re-election, he received $31,700 in contributions from the payday lending industry, according to data from the Center for Responsive Politics (CRP). Payday lenders spent $4.5m on lobbying in 2016, the last election year, and another $3.1m in 2017, according to CRP.
“We have been worried that the CFPB could revisit these rules. We just didn’t expect it so soon,” said Lauren Saunders with the National Consumer Law Center.
The cornerstone of the rules enacted last year would have been that lenders must determine, before giving a loan, whether a borrower can afford to repay it in full with interest within 30 days. The rules would have also capped the number of loans a person could take out in a certain period of time.
If allowed to go into effect, the rule would have had a substantial negative impact on the payday lending industry, where annual interest rates on loans can exceed 300%.
The industry derives most of its profits from repeat borrowers: those who take out a loan, but struggle to repay it back in full and repeatedly renew the loan. So when the rules were finalized last year, the bureau estimated that loan volume in the payday lending industry could fall by roughly two-thirds, with most of the decline coming from repeat loans no longer being renewed. The industry, which operates more than 16,000 stores in 35 states, would probably see thousands of payday lending store closures nationwide. But most of these rules would not have gone into effect until August 2019.
Since Obama appointee Richard Cordray stepped down as director of the CFPB in November, the Trump administration has been moving quickly to clamp down on the bureau’s activities.
The payday lending rules were finalized in the last weeks of Cordray’s tenure. There is a bill in front of Congress that would repeal the payday lending rules entirely as well.
A total repeal of the rules, if the CFPB decides on one, could take years to wind itself through the appropriate regulatory channels. The CFPB would have to conduct research to show the current rules are not working, put out notices for repealing the rules, and consider public and industry comments, among other steps. The bureau started building a case for its current payday lending regulations back in 2012.
A CFPB spokesman referred questions about what specifically the bureau plans to do with the payday lending rule to Mulvaney’s office in the White House, which declined to comment beyond the original statement.
Dennis Shaul, CEO of the Community Financial Services Association of America, which represents the payday lending industry, said he was “pleased” that the CFPB was revisiting the regulations.
