Whether or not Chuck Brennan wins his lawsuit and gets his South Dakota lending license back, the payday lender faces new federal regulations that will make it harder for him to fleece his customers in Utah, California, and Nevada.
The Consumer Financial Protection Bureau has proposed rules that would require payday lenders to “verify key information from prospective borrowers, such as their income, borrowing history and whether they can afford the loan payments.” The rules aren’t killers: Governing reports they would only short-term loans once the borrowers reach their sixth loan. However, if Congress doesn’t block those rules, they could help protect vulnerable borrowers from being sucked into loans they can’t afford.
The advent of tougher federal rules could mean more lenders going to Pierre to lobby for softer state regs, says Diane Sandaert of the North Carolina-based Center for Responsible Lending, which helped us pass our 36% payday lending rate cap in 2016:
Despite the new regulations, Standaert and others say state policymakers should stay on guard. “We’ve seen this trend of payday lenders using the activity at the federal level as an excuse to try to persuade state legislators to weaken [their own] consumer protection laws,” she says.
Indeed, as it became clear that the feds would regulate payday lending, the industry stepped up its efforts to loosen protections at the state level. Over the past two years, more than a dozen states have been lobbied to make laws more friendly to payday lenders. All efforts have so far failed except in Mississippi, which allowed car titles to be used as collateral in certain types of short-term loans [Liz Farmer, “Feds to Crack Down on Payday Lenders and the Debt Trap They Set,” Governing, 2017.09.27].
We know how eager South Dakota’s Republican legislators are to undo the will of the people as expressed in our ballot measures. We need to keep an eye on Pierre and the payday lenders and make sure they don’t claim they can unravel the 36% rate cap once the CFPB imposes its stricter requirements. As Farmer notes, rate caps are “the most effective way of stopping the potential harms of payday lending.” Even if state rate caps like South Dakota’s and Montana’s (passed in 2010) drive some borrowers to even riskier online payday loans, that effect is temporary:
Studies show that when the state-based payday loan option is taken away, consumers may flock online — but only temporarily.
In Montana in 2014, after complaints against online lenders spiked at more than 100 a year, the number began to plummet. In 2016, they totaled seven. What had looked like a crisis turned out to be an adjustment period. That is, while some Montanans may have turned to online lenders to fill their need for ready cash, they eventually weaned themselves off the payday practice. They turned to friends and families for financial help. In some cases, credit unions offered loans as a way to attract people into opening a bank account. “People went back to the exact same things low-income families did before 1999 when we allowed payday lending,” says Montana state Rep. Tom Jacobson, who is the CEO of a financial counseling business. “They got by” [Liz Farmer, “The Myth vs. the Truth About Regulating Payday Lenders,” Governing, March 2017].
Let’s keep the poor out of debt traps… and let’s keep Chuck Brennan out of business in South Dakota. Support the CFPB rules, and keep South Dakota’s 36% rate cap!