After long wait, new agency takes up role overseeing payday loans
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.
Barack Obama presidential campaign, "Barack Obama: Supporting Urban Prosperity," 2008
Consumer Financial Protection Bureau, "The CFPB launches its nonbank supervision program," Jan. 5 2012
Consumer Financial Protection Bureau, "Examination Procedures: Short-Term, Small-Dollar Lending, Commonly Known as Payday Lending”
Barack Obama, transcript of the State of the Union Address, Jan. 24, 2012
Washington Post, "Senate blocks Richard Cordray confirmation to head consumer watchdog agency," Dec. 8, 2011
ABC News, "Obama Sidesteps Elizabeth Warren, Picks Richard Cordray to Lead Consumer Financial Protection Bureau," July 18, 2011
Huffington Post, "Richard Cordray, CFPB Chief, Promises New Scrutiny Of Banks That Make Payday Loans," Jan. 19, 2012
Email interview with Kathleen Day, Washington office of the Center for Responsible Lending, Aug. 3, 2012
Financial reform bill includes payday, disclosure provisions
On the campaign trail, President Obama made several promises to help consumers navigate the complex world of the financial services industry. He pledged to create a Homeowner Obligation Made Explicit (HOME) score for mortgage comparisons, establish a credit card bill of rights, and create new financial regulations. He also promised to cap interest rates on payday loans and to improve lender disclosure.
"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 last time we reviewed this promise, we rated it In the Works. Congress was considering legislation to overhaul Wall Street, which included the creation of a new Consumer Financial Protection Bureau. The new agency would be responsible for writing new rules on financial consumer products--including payday loans--and enforcing existing bank and credit union regulations.
President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law on July 21, 2010, so we thought it would be a good time to revisit this promise.
Notice that the promise actually includes three separate provisions: capping payday loan interest rates, improving lender disclosure, and supporting initiatives to improve financial literacy. We'll look at all three parts.
Starting with payday loans, the final version of the bill calls for creation of a new consumer protection bureau. The new agency will be a part of the Federal Reserve, and will have a director appointed by the President. The bill specifically states that it will have the authority to impose new regulations on payday lenders.
The bill also creates a new Office of Financial Literacy. There are still a lot of details to hammer out, but it clearly addresses Obama's promise to improve financial literacy among consumers.
Finally, the legislation includes several disclosure provisions. It calls on lenders to "disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes," according to the bill summary. It also requires the lender to verify that the loan can be repaid.
President Obama promised to cap interest rates on payday loans, improve lender disclosure, and support financial literacy initiatives. He made major progress on all three parts of the promise by signing legislation to overhaul Wall Street in July 2010. There is still much work left to do, however, before this becomes a Promise Kept. The Consumer Financial Protection Bureau only exists on paper so far, as does the Office of Financial Literacy. We'll keep watching how things develop over the next several months, but for now, we're keeping this one In the Works.
House Committee on Financial Services, Press Release: Dodd-Frank Wall Street Reform and Consumer Protection Act, June 29, 2010
PolitiFact.com, Facts on Financial Reform, by Angie Drobnic Holan and Lukas Pleva, July 16, 2010
The Washington Post, Payday lenders and check cashers fight financial reform legislation in Congress, by Ylan Q. Mui, May 10, 2010
CNN Money, No more 400% loans in Arizona, by Aaron Smith, July 13, 2010
Personal Money Store, Office of Financial Literacy tucked away in financial reform bill, by Thomas Hart, June 29, 2010
Credit.com, Government hopes to unveil new Office of Financial Literacy to help consumers improve personal finances, June 24, 2010
ConsumerAffairs.com, Payday Lender Complains About Financial Reform Bill, by Mark Huffman, July 19, 2010
Phone interview, Kathleen Day, Center for Responsible Lending, July 21, 2010
Consumer Protection Agency could regulate payday loans
Find yourself short of money with only a few more days until you get paid? That's where payday loans come in.
"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, or FDIC. "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."
Some states regulate payday lenders to set limits on how much they can charge; others do not. Currently, no federal agency or law sets limits.
That might change, though. Congress is considering legislation to overhaul Wall Street, and that includes the creation of a new Consumer Financial Protection Agency. That agency would have the authority to protect consumers when they borrow money, and payday lenders would seem like an obvious target.
The creation of a Consumer Financial Protection Agency has been somewhat controversial. The U.S. House of Representatives has approved legislation that creates the new agency, but the Senate has yet to weigh in.
Yes, all this is a long way from capping interest rates on payday loans. But the pending legislation is enough for us to move this to In the Works.