On Tuesday, the Consumer Financial Protection Bureau (CFPB), a financial watchdog agency, made headlines by rolling back rules for payday lenders. The revised rules say lenders no longer have to assess if borrowers can afford to repay short-term loans.
The Obama-era rule created mandatory underwriting for any company offering short-term loans. Short-term loans, a.k.a. payday loans, are known for high fees. These loans may have an annual percentage rate (APR) close to 400%—which can make them difficult to pay off.
Finalized in 2017, the original rule said lenders must determine someone’s ability to repay these costly loans. Before approving a short-term loan, lenders had to verify the following details:
The original rule said loans without these guidelines were “an unfair and abusive practice.”
According to the Pew Charitable Trust, the rule was working. “Lenders were beginning to make changes even before it formally took effect, safer credit was already starting to flow and harmful practices were beginning to fade,” said Alex Horowitz, a senior research officer with Pew Charitable Trust’s consumer finance project.
But the revised rules have walked back these underwriting requirements—and this has left 12 million Americans who use payday loans every year exposed to unaffordable payments, according to Horowitz.
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Many consumer advocates, including former CFPB director Rich Cordray and others, have also spoken out against the new reform.
“It is truly shocking that the CFPB, an agency created to protect families from financial abuses, is bending over backward to side with the most scurrilous lenders over the consumers it is supposed to protect,” National Consumer Law Center (NCLC) associate director Lauren Saunders said in a statement.
To protect families, the organization has asked Congress to pass a national interest rate cap of 36%—a move they say has broad support from Americans across the political spectrum. The NCLC would also like to see state-level interest rate caps.
You can see a complete breakdown of each state’s payday lending statutes—including the maximum loan amounts, loan terms and finance charges—here.
