Federal change in payday lending restrictions won’t undermine Ohio law
Federal change in payday lending restrictions won’t undermine Ohio law
WASHINGTON, D.C. - A Trump administration drive to relax regulations on payday lenders won’t put the brakes on Ohio’s newly adopted protections for payday lending customers, though it will reduce the protections Ohio consumers receive under federal law.
Payday lending regulations that Ohio adopted last year are more stringent, in many respects, than rules that the Consumer Financial Protection Bureau (CFPB) adopted in 2017 to keep low-income borrowers from being trapped in a cycle of debt, says former CFPB director Richard Cordray.
“Those measures will go forward regardless of what happens at the federal level,” says Cordray, A Democrat who left the CFPB to unsuccessfully run for Ohio governor shortly after the federal payday lending rules he endorsed were finalized. “Our CFPB set up a federal floor and did not interfere with states doing more.”
Danielle Sydnor, who heads the NAACP’s Cleveland branch, views payday lending as a “necessary evil” that provides small short-term loans to individuals with thin credit who lack savings to pay for emergencies like car repairs. But she says the loans historically trapped customers in a cycle of debt.
When Cordray was in charge, the CFPB decided to require that payday lenders determine upfront whether low-income borrowers could afford the terms of the small loans they were securing with income from their next paychecks. The requirement was adopted after the CFPB found that many loan customers ended up repeatedly paying steep fees to refinance the same debt, turning a single loan into a long-term debt trap whose consequences could include shuttered bank accounts and seized vehicles.
Ohio’s payday loan law has drawn much scrutiny this year. Richard Cordray, the Democrat running for governor, says his state has the worst law in the nation. https://t.co/nbC6kn8F5S pic.twitter.com/bJovlMMhfM— PolitiFact (@PolitiFact) June 8, 2018
Research by the Pew Charitable Trusts found the average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees to repeatedly borrow $375. The average fee at a storefront loan business is $55 per two weeks. The organization says payday loans are usually due in two weeks and are tied to the borrower’s pay cycle. Payday lenders have direct access to a borrower’s checking account on payday, electronically or with a postdated check. This ensures that the payday lender can collect from the borrower’s income before other lenders or bills are paid.
After Cordray left, his business friendly successor, Chagrin Falls native Kathy Kraninger, eventually took charge of the bureau. She proposed rescinding that requirement, arguing there was insufficient evidence for it and expressing concern it would “reduce access to credit and competition.” The CFPB will make a final decision on the proposal after a 90-day public comment period.
Kraninger left another restriction intact that blocks payday lenders from making more than two successive efforts to debit money from borrowers’ bank accounts without obtaining new authorization. That provision was implemented to keep consumers from being charged multiple overdraft fees over the same debt.
“The Bureau will evaluate the comments, weigh the evidence, and then make its decision,” said a statement from Kraninger. “In the meantime, I look forward to working with fellow state and federal regulators to enforce the law against bad actors and encourage robust market competition to improve access, quality, and cost of credit for consumers.”
CFPB is proposing to unwind the core part of its payday loan rule - that the lender must reasonably assess a borrower’s ability to repay before making a loan. It’s a bad move that will hurt the hardest-hit consumers. It should be and will be subject to a stiff legal challenge.— Rich Cordray (@RichCordray) February 6, 2019
Kraninger’s proposal got mixed reviews, even from trade groups that represent payday lenders. The Consumer Financial Services Association trade group for the short-term lending industry endorsed her policy reversal but said it didn’t go far enough toward repealing all the payday lending regulations Cordray approved.
“These rulemakings are good first steps, and we appreciate that the CFPB has recognized some of the critical flaws,” said a statement from the group’s CEO Dennis Shaul.
Ohio Democratic Sen. Sherrod Brown was more critical, calling the move an “attack on the payday lending rule” that would put thousands of hard working families at risk.
“Kraninger should be standing up for her fellow Ohioans, not shamelessly helping payday lenders rob families of their hard-earned money,” said a statement from Brown, the top Democrat on the Senate Committee on Banking, Housing and Urban Affairs.
National Consumer Law Center associate director Lauren Saunders said Kraninger’s proposal “tears out the guts of the rule,” and Consumer Federation of America financial services director Christopher Peterson called it a “deeply disappointing betrayal of the agency’s mission.”
“This is payday lender protection rulemaking, not consumer protection rulemaking,” Peterson said.
After the CFPB rules were finalized, Ohio adopted its own payday lending laws. The state legislature acted after the departure of former Ohio House Speaker Cliff Rosenberger, under whose leadership the legislation had stalled. Rosenberger resigned amid reports the Federal Bureau of Investigation was probing a trip to London he took with payday loan industry lobbyists.
Must-read story from @JMBorchardt: “Former Ohio House Speaker Cliff Rosenberger used strong-arm tactics to tank a bill to regulate the payday loan industry, including threatening loan companies that were trying to work on a compromise” https://t.co/1fTX1uxCQy— Jeremy Pelzer (@jpelzer) May 24, 2018
A decade earlier, Ohio had passed a bill reducing the annual interest rate cap on payday loans from 391 percent APR to 28 percent. But lenders figured out ways to skirt the rules, such as charging ridiculously high fees, issuing loans as checks, then charging high fees to cash the checks; operating under the Mortgage Loan Act; or falsely posing as Consumer Service Organizations, says Bill Faith, the Coalition on Homelessness and Housing in Ohio executive director.
Kalitha Williams, project director of asset building for Policy Matters Ohio, says the end result turned Ohio into the “wild, wild west” of payday lending with rates that went as high as 788 percent.
The new law closed loopholes that allowed lenders to evade the previously adopted 28 percent interest cap and takes other measures intended to keep loan costs from spiraling out of control:
Limits loans to a maximum of $1,000.Limits loan terms to 12 months.Caps the cost of the loan - fees and interest - to 60 percent of the loan’s original principal. Prohibits loans under 90 days unless the monthly payment is not more than 7 percent of a borrower’s monthly net income or 6 percent of gross income. Prohibits borrowers from carrying more than a $2,500 outstanding principal across several loans. Payday lenders would have to make their best effort to check their commonly available data to figure out where else people might have loans. The bill also authorizes the state to create a database for lenders to consult.Allows lenders to charge a monthly maintenance fee that’s the lesser of 10 percent of the loan’s principal or $30.Requires lenders to provide the consumers with a sample repayment schedule based on affordability for loans that last longer than 90 days, the.Prohibits harassing phone calls from lenders.Requires lenders to provide loan cost information orally and in writing.Gives borrowers 72 hours to change their minds about the loans and return the money, without paying any fees.
Williams says the Ohio law was designed to complement the federal rules implemented under Cordray, and it would be bad for consumers in the state to lose its protections, because the state law doesn’t require that lenders gauge whether their borrowers could repay the loans, like the federal regulation does.
“We think both are needed,” says Williams.
Fortunately for Ohio, lawmakers already got the job done last year when they modernized state payday loan laws by passing HB123. The CFPB capitulation to payday lenders won’t harm Ohio. https://t.co/rdaNuAt05G— Nick Bourke (@nibosays) February 9, 2019
Ohio CDC Association Executive Director Nate Coffman says the new state law will save Ohio payday loan customers a minimum of $75 million a year, and make it four times less expensive for them to borrow money. He says other states, like Kansas, are looking at the Ohio law as a potential model for their own reforms.
“As long as this group controls the CFPB, it would be good for other states to pass their own laws, because it appears that for the time being, there won’t be any halfway reasonable assistance from the bureau,” says Coffman, whose organization is a membership group for community development corporations.
Cordray says that issuers of credit cards and mortgages have to assess whether borrowers can repay loans, so the CFPB under his watch thought it would make sense for the payday loan industry to do the same thing. While payday loan groups like the Ohio Consumer Lenders Association argued the change would “greatly reduce or eliminate short-term lending options for more than 2 million Ohioans,” Cordray notes that the citizens of the 18 states that forbid payday lending seem to be doing fine without it.
Now that he’s gone, Cordray says the bureau under President Donald Trump “has taken the side of the financial industry rather than aggressively supporting consumers.”
“It’s unfortunate and the wrong approach,” says Cordray, who is writing a book about his time at the CFPB. “Whatever they do will end up in the courts.”