During the 2008 presidential campaign, Barack Obama promised to "cap outlandish interest rates on payday loans and to improve disclosure” of the short-term, high-interest loans. After years of partisan wrangling, the administration has essentially achieved its goal.
First, some background. "Payday loans are small-dollar, short-term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment," according to the Federal Deposit Insurance Corporation. "Payday loans are usually priced at a fixed-dollar fee. Because these loans have such short terms to maturity, the cost of borrowing, expressed as an annual percentage rate, can range from 300 percent to 1,000 percent, or more."
The key to keeping this promise was the creation of the Consumer Financial Protection Bureau, a new agency that would be responsible for writing new rules on financial consumer products, including payday loans. Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010, making the CFPB a reality.
However, the new agency languished amid opposition by congressional Republicans. Obama's first choice to head the agency, Elizabeth Warren, served on an interim basis; facing strong GOP opposition to Warren, Obama eventually named former Ohio attorney general Richard Cordray to become the agency's first director. Republicans then voiced their opposition to Cordray. Cordray's nomination was rejected by the Senate, falling seven votes short of the 60 required.
It's important to note all this background because while the signing of the law and the creation of the agency made the federal government able for the first time to regulate the payday loan industry -- which historically has been left up to the states -- the implementation of actual regulations was hampered for months by the turmoil surrounding Obama's efforts to name a permanent head for the agency.
Progress on this promise finally accelerated in January 2012. That month, Obama used his recess appointment power to name Cordray to head the agency. Obama also reiterated his focus on this promise by devoting a line in his January 2012 State of the Union address to payday-loan regulation. And the agency launched the nation's first program for supervising "non-bank” financial services, which include payday loan providers, as well as debt collectors, mortgage companies and credit-score companies. Cordray, speaking at a public hearing in Birmingham, Ala., even warned traditional banks that their own payday-loan-like practices would be subject to agency scrutiny.
According to the agency, the supervision of non-banks such as payday loan outlets will be "consistent,” to "help level the playing field for all industry participants to create a fairer marketplace for consumers and the responsible businesses that serve them. … To accomplish these goals, the CFPB will assess whether non-banks are conducting their businesses in compliance with federal consumer financial laws, such as the Truth in Lending Act and the Equal Credit Opportunity Act.” The agency says it will require non-banks to file reports and review the companies" consumer materials, compliance systems and procedures. More details on the agency's regulatory approach are available in this manual.
It's worth noting that the 36 percent interest cap, something Obama specifically cited in this promise, is not included in the new agency's purview. "From the beginning of the creation of the CFPB, everyone agreed there would be no interest rate caps -- it was a non-starter” for the industry, said Kathleen Day, who manages media for the Washington office of the Center for Responsible Lending, a group that targets what it considers abusive financial practices. "But there's more than one way to skin a cat.”
The other two aspects of the promise have been carried through. The CFPB has an Office of Financial Education that is dedicated to increasing financial literacy, and its examination manual includes repeated mentions of disclosure requirements.
We considered whether to rate this a Compromise because the payday loan examination process is not fully operational. However, we decided that, despite the long delay from partisan wrangling, the Obama administration has put into place the fundamentals to carry out its promise. If roadblocks emerge, we may downgrade our rating, but for now, we're calling this a Promise Kept.