Does Payday Loan Regulation Go Too Far?

February 16, 2016 at 9:54 am Leave a comment

Just how controversial the CFPB’s proposal to regulate payday lending will be when it gets around to formally rolling out a regulation was underscored by a House Financial Service subcommittee hearing on Thursday entitled “Short-term, Small Dollar Lending: The CFPB’s Assault on Access to Credit and Trampling of State and Tribal Sovereignty.” So much for subtlety.

I hope this is an issue where the rhetoric doesn’t consume what should be a serious and important discussion about how best to balance the inevitable needs of some consumers for emergency cash against the legitimate interest of government in preventing lenders from gouging these consumers.

First a recap. For years, the Bureau has been examining payday loans and it doesn’t like them.  A little more than 10 months ago it published the outline of a proposal, but did not formally propose a regulation.  The proposal has many similarities to the Qualified Mortgage Rule.  Lenders making payday loans would either have to underwrite them and be assured they can be repaid or they could offer loans that have certain characteristics.  There would be limits on the number of times short-term loans could be refinanced and mandatory breathing periods to make sure that members don’t take them out to often.   (https://newyorksstateofmind.wordpress.com/2015/03/26/cfpb-moves-to-regulate-payday-loans/).

First, the supporters of reform have a point. Look at the statistics.  Many people who take out payday loans end up in worse shape than they were in before borrowing the money.  According to the CFPB’s testimony, 35% of borrowers are able to repay the loan when due without quickly re-borrowing, and that 15 percent of borrowers took out 10 or more loans in rapid succession.

Should payday loans be regulated on the national level? They have to be.  Indiana AG Greg Zoeller kicked off the hearing by arguing that CFPB could undermine the efforts of states to balance consumer protections against consumer access.  He correctly stated that the “issue is not simply whether the regulatory framework that the CFPB has proposed is best for the consumers in my state but whether the rules that provide for both access to credit and protection from predatory lending are best done in Washington for the nation or by each individual state.”

This sounds great but there are issues that have to be dealt with on the federal level because it’s impossible for individual states to shield themselves from another state’s policies. This is why Madison wanted a Constitution with a commerce clause.  For example, New York effectively bans payday loans by capping usurious interest rates.  But, despite the best efforts of NY regulators, New Yorkers can go online and get these loans from states and Indian reservations where they are legal. (I have always thought the issue would ultimately be decided by the Supreme Court, but with the untimely death of Antonin Scalia, that prospect is several years away).

Finally, is it really asking too much for lenders to demonstrate why they think a person to whom they are giving a loan has the ability to repay it?

Does this mean that level-headed critics of the CFPB are wrong to be concerned? No.  Listen, this is one area where it’s tempting to say “neither a borrower nor a lender be,” but the truth is people need short-term money and responsible lenders willing to lend it to them.

For me, the most important issue is defining a “payday loan.” The NCUA is concerned enough about CFPB’s plans that it wrote a comment letter explaining that it could potentially prohibit credit unions from making agency sanctioned payday loan alternatives available to members.

State Cashes in on Mortgage Settlement

On Thursday, it was announced that Morgan Stanley had reached a $3.2 billion nationwide settlement involving claims it had misrepresented the quality of mortgage backed securities it sold in 2006 and 2007 that tumbled in value when mortgage values crashed in 2008. The settlement includes $150 million paid directly to the AG and $400 million in consumer relief.  (http://www.ag.ny.gov/pdfs/MS-Final_NYAG_Settlement_Agreement.pdf).

In December, the investment bank agreed to pay $225 million to settle similar claims in a lawsuit brought by NCUA. (https://www.ncua.gov/newsroom/pages/news-2015-dec-settlement.aspx

Entry filed under: General, Mortgage Lending, New York State, Regulatory. Tags: .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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