Fact Checked

Your rundown of the CFPB’s payday lending rule: What it means for you

Nomination Hearing Held For Kathleen Laura Kraninger To Become Director Of Bureau of Consumer Financial Protection Photo by Alex Wong/Getty Images News/Getty Images Image:

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The Consumer Financial Protection Bureau was established under the Obama administration to “protect consumers from unfair, deceptive, or abusive practices,” according to its mission. As part of this effort, the agency issued a new payday lending rule in 2017 to regulate high-cost, short-term loans that consumers can get from certain lenders.

The rule had been slated to go into effect in August this year. But in February, under its new director, Kathy Kraninger, the CFPB proposed changes to the rule, including …

  • Delaying the effective date of the rule until November 2020
  • Removing a major provision that would require lenders to determine whether people have the ability to repay their loans according to the loan terms before giving them the money

The controversy? The CFPB says the payday lending rule as-is will cut off access to a borrowing option that a lot of people depend on. Others argue the CFPB’s proposed changes are in direct conflict with its mission.

Want to know more?

What is the payday lending rule?

The idea behind the rule — informally known as the payday lending rule — is to protect consumers from the financial dangers of payday loans. Payday loans, along with title loans and other high-cost installment loans, typically come with steep fees and other terms that can make it tough to repay even small amounts of debt — often triggering a devastating cycle of high-cost borrowing. A typical payday loan lasting two weeks costs $15 in fees for every $100 borrowed, according to the CFPB’s own research. That equates to an annual interest rate nearing 400%.

One of the payday lending rule’s key provisions — known as the ability-to-repay provision — would require payday and auto title and certain other lenders to assess people’s ability to repay before issuing them loans.

Why does this matter?

Supporters of the ability-to-repay provision say it’s necessary to rein in an epidemic of people taking out payday loans and repeatedly rolling over their loan repayments, burying themselves in debt.

But the CFPB says the ability-to-repay provision would sharply restrict its ability to issue loans, effectively killing the payday lending industry and eliminating a much-relied-on borrowing option for consumers.

Consumer advocates are worried that the CFPB’s proposal to strike the ability-to-repay requirement is a sign that the agency is backing away from its mission of protecting Americans from unfair financial practices and regulating financial products like student loans and payday loans. With Kraninger as its new director, critics say the agency has been undergoing a shift toward more conservative rule-making and enforcement. 

What’s next?

The CFPB made its proposal to drop certain provisions from the rule in February. The required public comment period ends May 15 just before midnight — after which the agency can proceed with finalizing its changes to the payday lending rule.

If you’d like to learn more about the proposed changes and comment before the deadline next month, you can go to this website and click the “Comment Now” button at the top-righthand side of the page.