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CFPB May Place Tougher Regulations on Payday Lenders

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!

20 Comments

  1. Steve Hickey 2017-09-28 14:46

    Did you notice in the Argus article earlier in the week that Dollar Loan Center has sued 290 people in our state since May? No other business in the state is comparable to that number in small claims against custumers. The reason for this number is because the borrowers are not able to go across the street any more and get another loan to pay Chuck off. The point is his model is based on people paying him back by borrowing more elsewhere. It’s a debt trap. Getting rid of Chuck takes some pressure off the courts.

  2. Darin Larson 2017-09-28 15:32

    Steve, I’m hoping that many of those loans might be deemed unenforceable and uncollectable because they were illegal when made. Preying on the poor and destitute should have consequences. Karma is a female dog.

  3. Ryan 2017-09-28 16:34

    I absolutely love that Chuck is getting destroyed left and right because he seems like a total dirtbag, however I still don’t think that we need laws to protect people from these types of businesses.

    I disagree that they are “preying on the poor and destitute.” Nobody is going door-to-door to trick grandma into signing a payday loan that she can’t afford to pay back. Nobody is pulling a bait-n-switch on the public. These people walk their butts into the DLC and ask for money on credit, which they likely have none. When they sign the paperwork to take out these loans, they know they need to pay them back, and I would guess many of these people take the loans knowing darn well they can’t or won’t pay them back. Them going “across the street” to “get another loan to pay Chuck off” is a symptom of the underlying issue. Some people don’t manage their finances very well. Some people make poor decisions when trying to live outside their means. This is not Chuck’s fault or the fault of any other payday lender. I’m still interested to see evidence that anybody is better off with payday loans no longer being available. Is everyone all of a sudden financially mature and financially stable? Does everyone now make smart, forward-thinking decisions with their money? Pssssshhhhhhht. Nope. Unnecessary legislation right down to the letter.

  4. grudznick 2017-09-28 17:16

    Mr. Ryan, if I was a religious fellow I would say “amen” to your comment, which could be aptly summarized as “you just can’t outlaw stupid.”

  5. Darin Larson 2017-09-28 18:00

    Ryan, this argument has been hashed out before, but I don’t agree that just because some people have made bad choices in life (in addition to all the people that are poor and destitute through no fault of their own) that we should allow loan sharks to prey on them. This would in effect be state sanctioned usury.

    As one of a thousand examples of conduct that we don’t allow under the law, take the case of price gougers for gasoline, food or other necessities in the aftermath of a hurricane. You could argue that people should be able to charge whatever they want for those items just like Chuck Brennan used to be able to charge whatever he wanted for an interest rate. But as a society, we are going to prohibit the taking advantage of disadvantaged people during times of shortage just like we are going to prohibit the taking advantage of people with 500% interest.

  6. grudznick 2017-09-28 18:10

    Mr. Larson, if the food needers in your example weren’t there because of a hurricane, they would be like people who day to day need food. Those people have ways like welfare to get free food. If we are going to say they should go to lenders and borrow money for food, then we should scale back welfare now that they cannot be hit with, voluntarily hit with, bigger interest rates than anybody not stupid would sign up for.

  7. Ryan 2017-09-28 19:48

    I said something similar to this in a previous comment on a related DFP blog post. The comparison to price gouging in a disaster is close, but not close enough. We aren’t talking about a company that offers a product year-round at a certain price and then increases that price when something bad happens in order to take advantage. We’re talking about a business model that operates because there is a certain percentage of the population who either doesn’t want to or can’t use other traditional sources of funding. I agree a lot of people end up taking out new loans to pay off old loans because they signed up for something they couldn’t pay for, but that shows a lack of personal accountability, not any wrongdoing on the part of the lender. I just can’t agree with legislating voluntary contractual rights related to otherwise legal transactions.

    What about the prices for hotdogs or beers at a ballgame? Those vendors have a higher mark-up on their goods than payday lenders.

    These lenders have high interest and fees because the market allowed them to. The demand was there for the supply. Just like overpriced beers. Or girl scout cookies.

    I think this legislation came about because people outside the situation thought their pity should be displayed in writing as guidance to these poor, innocent victims of predatory lenders. How lucky they they should feel to have been saved. Except, who benefits from this exactly? Are these former borrowers getting cash from somewhere else now? Like more reasonable loans or public assistance? Nope. Because if they could, they already would have been doing so before this waste of time and public funds legislation.

    Want proof that borrowers want this business model to exist as an option for quick cash? Brennan made a bunch of loans with crazy interest and fees even after the law passed. People were still knocking on his door asking for some quick dough, and we’re willing to pay up for the convenience. Victims they are not.

  8. Cory Allen Heidelberger Post author | 2017-09-29 09:24

    I like Darin’s point: even if no one provides evidence that consumers are “better off” (more “financially mature and financially stable,” to use Ryan’s suggested criteria), we can still defend government intervention in payday lending as a way to stop lenders from engaged in exploitative activities.

    I’ll analogize to prostitution: banning prostitution may not make prostitutes more financially mature or stable. Such a ban denies women a viable revenue stream and may lead to some women making less money to feed their families. But we can still justify a ban or at least restrictions on prostitution to prevent pimps from luring women and girls into an exploitative situation.

  9. Ryan 2017-09-29 10:00

    It’s illegal, so there are no pimps out there luring poor impressionable girls into exploitative situations, right? The law doesn’t change the reality of the situation going on. It’s just words on paper. I think the evidence from other countries actually shows that when prostitution is legal and regulated, women are more often able to control their circumstances and safety. This is a very different subject than predatory lending, but I honestly think prostitution should be legal, too. The result of it being illegal is not a reduction in the amount of sex that is sold or a reduction in number of women being exploited – the result is police officers spend time and money chasing prostitutes and pimps; the courts spend time and money on the prosecution of these people; and then the correctional facilities spend money and square footage holding them in cages. All at the taxpayers’ expense.

    Violence against women by pimps should be illegal, definitely. Or kidnapping, or theft, or any other person-to-person crime. React to the actual problem – the violence, for example – not the underlying industry of selling sex. Selling sex isn’t the problem, the problem is that the underground market for illegal vices is a rough and ugly market – driven by silly laws protecting people from what society thinks are taboo actions. The market isn’t going away because laws say so.

    This correlates to the so-called predatory lenders. If a person misrepresents the terms of a contract, or secures that contract through fraud, or enforces that contract through violence – those behaviors should be dealt with harshly because it is wrong on an instinctual level. If a person voluntarily signs a contract with terms that are less than ideal because he is broke and needs some cash now, he has weighed the want for the cash against the position the resulting debt puts him in. Telling lenders that some arbitrary number is the highest interest they can charge without being “unfair” is overreach by the government.

    I don’t support making pointless laws for the sake of patting each other on the back for pretending to protect a group of people from the boogeyman. Why should we “defend government intervention” that produces no results?

    Might as well make tornadoes illegal so the people in the trailer homes can sleep better at night.

  10. Darin Larson 2017-09-29 11:24

    Ryan, you live in a different world then I do, apparently. This discussion is far afield, but I can’t help but respond to your argument here. You say we’re not going to stop prostitution and the exploitation of women by outlawing it, so we should just allow it. But we should outlaw violence against those women because, what?, there won’t be any violence against women if we outlaw violence? Your logic escapes me.

    Laws don’t mean the prohibited conduct will never occur. Laws mean you will be punished if the conduct occurs and they contribute to deterrence and public stigma against the conduct as well as removal of the offender from society so they can’t re-offend. If you think less women are going to be exploited if we make prostitution legal, I have a bridge to sell you.

    Based upon your views, I don’t think you have spent much time learning about how the criminal system works. Allowing the prostitution, but prohibiting the violence will just make prosecutors’ jobs more difficult. The violence takes place behind closed doors and the women are often too scared and brain washed to testify against their pimps. The prostitution charge is often made to stick by undercover stings where the pimp is caught. The undercover cop is not going to be in the room when the pimp is beating these women, typically. Less chance of successful prosecution just contributes to more of the outlawed conduct as more prospective pimps enter the trade and are not put in jail.

    Another example of outlawing conduct that is exploitative is the prohibition against insider trading. Investors in the stock market are less desperate and disadvantaged then the recipients of payday loans, but even so we outlaw insider trading to protect investors from being financially exploited by those people in a position to profit from non-public company information. Under your logic of “you takes your chances” when you invest in the stock market, insiders should profit from their knowledge at the expense of the investing public. But the public good is served by prohibiting insider trading because it instills confidence in stock market participants and the free flow of capital for business investment.

    You have to be a libertarian, am I correct? Life would be survival of the fittest in your world it seems.

  11. Ryan 2017-09-29 12:04

    I’m not a libertarian, or a democrat, or a republican, or any other label that would have me ignore a large portion of reality in favor of promoting a narrow brand of thinking. Survival of the fittest is the way of the whole wide world, Darin, not just my world.

    To your apparent surprise, I spent about a third of my life studying the criminal justice system and the law, and working in them day in and day out. I am confident that I understand the difference between causation and correlation when it comes to criminal behavior better than the general public. The reality is the deterrent effect of criminalizing prosecution is a joke because the enforcement is not nearly comprehensive enough to limit these actions. And then the penalties are delayed months or years in the court system, and the women get a fine that they never pay so they sit in jail a few weeks at our expense, just to get out and do it again. I think prostitution should be legal because if it is regulated and has oversight, it doesn’t create the illegal market that is otherwise created, and that brings with it drugs and violent crimes. Remove any other correlated crimes, and explain to me why a person shouldn’t be able to sell sexual activity? Frankly, our laws against prostitution and the enforcement of those laws are highly flawed and do not serve as a deterrent or as any form of rehabilitation.

    I think violent crimes against people should be illegal, not because I think making laws prevents crime, but because it allows us to pursue recourse against criminals. Imagine, if we didn’t waste all our law enforcement, court, and correctional facility resources on things like payday lenders, prostitutes, and weed smokers, how much we could do to educate, detect, prevent, or respond to actual problems, such as violent crimes, drunk driving, white collar crime, and all sorts of other things that are pushed to the side because some holier-than-thou type person makes interest rates or recreational drug use their pet project and whips everyone into a frenzy about a non-issue, while turning a blind eye to real, harmful crimes.

    If we had a criminal justice system with the resources and the desire to actually take violent crimes seriously, I believe people would be happier and safer. I think the system paying so much attention to interest rates, hookers, and drugs is a guaranteed path to failure. And so far, I’m right, based on the evidence provided by all the criminal justice systems around the world that are better than ours.

    I was respon

  12. Cory Allen Heidelberger Post author | 2017-09-29 15:20

    No, Ryan, I’m saying we can justify banning prostitution solely on the basic of preventing exploitation, without having to posit some moral education for the women we keep out of the profession.

    Your perception of the voluntary nature of singing a payday loan contracts ignores the reality and irrationality of desperation.

  13. Ryan 2017-09-29 16:46

    Criminalizing prostitution doesn’t prevent exploitation. All empirical evidence shows our laws banning drugs and prostitutes are ineffective at achieving the stated goals. Regulation works better to minimize harmful societal effects, period. Let’s agree that we want to prevent exploitation and involuntary prostitution. So let’s try to get real results. Through effective policies not just token sympathetic baloney like laws that don’t work. Results matter more than the ethically driven hope they these laws will prevent abuse, wrongdoing, violence, exploitation, or any other consequences.

    I respect your opinions a lot, Cory, but I think your and the general public’s perception that the borrowers are such helpless victims ignores the reality of “needy” being different than “wanty.”

  14. Cory Allen Heidelberger Post author | 2017-09-30 12:53

    Yet, Ryan, the evidence is pretty clear, even from the Division of Banking’s assessment of Dollar Loan Center’s loans this summer, that the payday lenders offer products that rope people into hard-to-escape debt. The product itself is defective and harms consumers. Maybe there’s an analogy to lemon laws for cars: we can force manufacturers to recall defective cars, so why not force lenders to “recall” (or in this case, forfeit) defective loans?

    No law will prevent all abuses or errors. We ban shooting people, but people still keep plinking off their neighbors. But we maintain our laws, catch and prosecute violators, and hope most people keep getting the message that some behaviors hurt society.

  15. bearcreekbat 2017-10-01 13:46

    Interesting discussion! One fact that has been overlooked is that by criminalizing particular behavior, such as prostitution, society creates an unintended impediment to the reporting of crimes, especially violent crimes against the prostitutes. A prostitute who is assaulted by a pimp or customer faces jail if he or she decides to report the crime to the police.

    Recently there have been stories reported about undocumented victims of domestic abuse and other crimes who fear reporting the crimes to law enforcement enforcement precisely because they fear deportation.

    http://www.npr.org/2017/05/25/529513771/new-immigration-crackdowns-creating-chilling-effect-on-crime-reporting

    That unintended consequence strikes me as significant and seems to support Ryan’s prostitution argument, although I do not see a similar issue with outlawing high interest loans.

  16. Cory Allen Heidelberger Post author | 2017-10-01 14:43

    I agree with the point about chilling effects on crime reporting; we must weigh such impacts against the merits of banning any anti-social activity. But as BCB notes at the end, we may not be able to identify any chilling effect on crime reporting that might come from capping interest rates at 36%.

  17. Darin Larson 2017-10-01 17:02

    I would assert that the chilling effect of not reporting violence against a prostitute by her pimp is typically caused by the prostitute being afraid of more violence against her rather than the threat of prosecution for prostitution. The prosecutors that I know would much prefer to put away the pimps for their violence and exploitation of women rather than pursuing charges against the exploited women.

    I also take issue with Ryan’s notion that we shouldn’t bother outlawing lower level offenses and we should just “regulate” them. I will agree that our criminal justice system is underfunded and without sufficient resources for many areas like addiction treatment and rehabilitation. But it certainly could be worse.

    Regulating crime as Ryan envisions it is morally repugnant to me. It sends the message that the state approves of the exploitation as long as it occurs within the regulations.

  18. Ryan 2017-10-02 11:29

    Darin, I just don’t see “the state” as my ethical, moral, or righteous guidepost as you must.

    You seem to think anything that “the state” hasn’t outlawed is something the state approves of, supports, or sanctions.

    I don’t think the role of the government should be to draft, implement, and enforce legislation for everything that is morally repugnant to you or some other arbitrary decider. Your viewpoint of what should or shouldn’t be a law seems to require asking the government to hold your hand for every decision in life and to make sure everyone thinks and acts just like you – because if somebody disagrees with what you think is right, or good, or not repugnant, we should spend “the state’s” resources to take away that person’s stuff and lock them in a cage because Darin doesn’t agree with their actions.

    And the beautiful thing is – I am agreeing with what you all keep suggesting is the goal – I just disagree that our existing methods are effective in achieving those goals.

    I think women should not be beat up – not by pimps or anybody else. I think violent crime is bad and should be controlled to the greatest extent possible. I think drug abuse is not a good thing and causes harm to people, families, and society. I disagree with several of you that just making those things illegal has any impact on their prevalence.

    I think we should reduce the harmful effects of these problems through proactive means like education; I think we should not lock people up for the use or possession of recreational drugs and should instead spend those resources on education and rehabilitation services; I don’t want any member of my family selling their body or sex for money. I just won’t ignore reality and pretend that banning problems fixes problems. We have examples from all over the world with how to minimize these problems, but we ignore those examples because it feels like “going easy” on criminals to educated and rehabilitate them. Instead, lets lock them up, take their personal property, pay $40k a year per inmate to house, feed, clothe, and care for their medical needs. That’s how dumb we can be as a society. We ignore results because appearances matter to us too much.

    I agree with your end game – I just think you are wrong in your thoughts about the correct approach.

  19. mike from iowa 2017-10-05 13:40

    http://www.reuters.com/article/us-usa-consumer-paydayloans/u-s-releases-rule-to-end-debt-trap-of-payday-loans-idUSKBN1CA24K?feedType=RSS&feedName=newsOne&google_editors_picks=true

    Wingnuts are planning to kill the regs asap.

    Ine other piece of news- Trans-Can has given up trying to build pipeline through Eastern Canada. They could have profitted more selling their crap in Canada instead of Texas. Apparently enviro groups proved to be too much to overcome. They still have plans for KXL for now.

  20. Cory Allen Heidelberger Post author | 2017-10-07 11:31

    From NPR on CFPB’s proposed rules:

    One new rule would require payday and auto title lenders to determine whether a borrower can afford to repay in full within 30 days. That could thwart a business model that consumer advocates say relies on the rollover of unpaid loans with the accumulation of exorbitant fees and interest rates of 300 percent or more.

    The proposed regulations also would limit the number of times a lender can debit a borrower’s account without being reauthorized to do so. As The Associated Press writes, “This is because many payday loan borrowers end up over-drafting their bank accounts, which in turn incurs fees” or forces them to close their accounts [Scott Neuman, “Consumer Watchdog Proposes New Rules On Payday Lenders,” NPR.org, 2017.10.06].

    This comes as the SD Division of Banking gives delicensed Dollar Loan Center special permission to collect on loans that were issued before last November and still haven’t been paid off eleven months later.

    Bloomberg’s editorial board, which appears to take a more business-oriented, lender friendly view, cheers CFPB’s new regs as a balanced approach “protecting vulnerable borrowers without cutting off their access to credit.”

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