The Tumultuous Regulation and Deregulation of Payday Loans
Loyola University Chicago School of Law, JD 2020
Each year, approximately twelve million Americans resort to payday loans for quick money to pay off bills and cover emergency expenses. The small, short-term unsecured loans give borrowers a quick way to get money with little consideration of their creditworthiness. Borrowers are plagued with extremely high annual percentage rates to offset the seemingly substantial risk to the lender. However, many studies have shown that payday loans carry no more long-term risk to the lender than other forms of credit. Lenders are able to gain from the high interest rates that burden borrowers while simultaneously benefitting from the relatively low-stakes gamble of the nature of the loan. This illuminates a harrowing truth: the real victims of exploitative and predatory “cash advances” are the borrowers themselves who continue taking on more and more of these high-interest loans in a vicious cycle to repay small debts.
Payday Lending in the United States
Predatory lending is not a new concept in the United States, with much of its history rooted in the Great Depression. During the Depression, loan sharks extended loans to desperate Americans, charging them absurd interest rates of up to 1000%. Banking deregulation in the late 1980s created a void for microcredit as small banks shuttered. This created the perfect environment for state-licensed payday lenders to prosper as states reconsidered usury – unreasonable or excessive interest rates – caps. The payday lending industry grew exponentially through the 1990s and into the 21stcentury. Today, payday lending is a $9 billion business.
Depending on state law maximums, payday loans can generally range from $100 to $1,000, have an average loan term of two weeks, and cost upwards of 400% annual interest (APR). Shorter term payday loans may have even higher APRs, especially in states where interest rates are not capped. In comparison, the average APRs of other forms of credit in the United States are drastically lower:
- Credit cards – 16.86-23.73%
- Federal student loans – 3.76-6.31%
- Personal loans – 9.8-28.2% (varies greatly based on credit score).
Payday borrowers are statistically uneducated, young, and low-income. An overwhelming majority of these individuals use the money to pay for recurring expenses and necessities such as credit card bills, food, and rent, revealing that most payday borrowers have an ongoing shortage of cash and need for more income. Many economists have argued that the payday industry relies on chronic borrowers who regularly roll over loans in debt cycles.
Obama Cracks Down
Throughout the twentieth century, variations of the Uniform Small Loan Law (USLL) were adopted by many states in the U.S. Eighteen states as well as the District of Columbia prohibit extremely high cost payday lending through various legal mediums including racketeering laws, criminal statutes, and state constitutional provisions. Three states – Maine, Oregon, and Colorado – allow lower-cost payday lending. Thirty-two states still permit high-cost payday lending.
In the wake of the Great Recession, President Obama expressed a desire to address the failures of consumer protection in the context of lending by creating a federal agency with a focus on protecting American consumers rather than banks. In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act which created the Consumer Financial Protection Bureau (CFPB). The bureau focuses on defending U.S. consumers seeking financial products and services.
The Obama administration took to regulating payday lending to protect low-income consumers who have little option but to take advantage of the fast cash. A rule finalized in October 2017 under Obama-appointee to the CFPB, Richard Cordray, required lenders to undergo a determination of whether borrowers could actually pay the debt back and to limit the number of loans that a lender could make to a specific borrower.
Trump Places Consumer Protection on Back Burner
In January 2018, the CFPB changed its tone. Now led by Trump-appointee Mick Mulvaney, the bureau announced that it would be suspending the Obama-era regulations indefinitely. The bureau stated that it would consider granting waivers to companies preparing to adapt to the Cordray regulation, allowing them to bypass the financial background examination of borrowers.
On November 7, 2018, the U.S. District Court for the Western District of Texas stayed the lending rule compliance date set by Mulvaney. The CFPB had previously stated that complying to the rule while its status was undetermined would cause irreparable damage – as a result of the costly and time-consuming transition to compliance – to payday lenders. After Mulvaney resigned in November 2018, the agency’s new chief, Kathy Kraninger, demonstrated her support for the continued overhaul, citing a desire to encourage competition in the payday lending industry and to give borrowers in need more credit options.
Outlook on Predatory Lending Regulation
The future of consumer financial protection under the Trump administration remains unclear. As the CFPB – the very agency created to combat predatory lending after a devastating economic downturn – continues siding with payday lenders, consumer interests are continually undermined in favor of “the spirit of competition.” While certainly not identical, the parallels between the contemporary payday loan industry and subprime mortgage crisis that led to the Great Recession are too apparent to be ignored.
However, not all hope is lost. The Federal Trade Commission (FTC) continues to protect consumers from deceptive and other illegal conduct in the payday lending industry that takes take advantage of financially distressed individuals. The FTC attempts to take action against payday lenders for misleading advertisements and billing as well as unlawful contractual clauses. The FTC’s success in stifling suspect payday lending is notable. In September 2018, the FTC returned a record $505 million to consumers harmed by a massive payday lending scheme operated by AMG Services, Inc.
The regulatory strength of the CFPB is in jeopardy under the Trump administration. Nonetheless, the vigor of other consumer protections agencies such as the FTC has yet to be diminished.