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CFPB Payday Loan Rulemaking is Imminent and Will Target Repeated Borrowing

Posted in CFPB Rulemaking, Payday Lending

The CFPB has marshaled data against what it sees as a sustained use problem by payday loan borrowers and is “in the late stages” of drafting rules to limit payday loan borrowing, according to Director Cordray’s remarks prepared for today’s field hearing.

It appears that in the near future the Bureau will issue a notice of proposed rulemaking in which it concludes that repeated payday loan borrowing is “unfair” or “abusive” under the Dodd-Frank Act.

In conjunction with a hearing today in Nashville, the CFPB Office of Research has released another payday lending report, this one focused on measuring “loan sequences,” which it defines as “a series of loans taken out within 14 days of repayment of a prior loan.” Specifically, the CFPB considers a renewal to mean either rolling over a loan for a fee or re-borrowing within 14 days after repaying a loan. The Bureau likely will use this new, broad definition of “renewal” to prevent consumers from repeatedly borrowing within the same pay period that they repay a prior loan.

Unsurprisingly, the report concludes that states with cooling-off laws like those in California and Virginia (which prevent a borrower from re-borrowing within the same day or one day of repayment) have the same seven-day and 14-day renewal rates as states without any cooling-off periods. The report also looks at the length of loan sequences (i.e., number of renewals), loan size and amortization over the course of loan sequences, and number of loan sequences over an 11-month period.

The report, the first in the Office of Research’s occasional “Data Point” publication series, uses the same data set as the Bureau’s April 2013 Payday Loans and Deposit Advance Products White Paper (which we wrote about here and here). The White Paper had been criticized by the CFSA, the national payday lender trade association, for using a sampling method that overstated borrowers’ loan volume and borrowing frequency. While the CFPB has never acknowledged shortcomings with the White Paper, the Office of Research apparently heeded the CFSA’s criticism in designing this new study. To measure loan sequence duration and annual usage, it analyzed only new loans made during the sample period (rather than including any loan that existed at the beginning of the period, which had caused the White Paper to overstate loan usage).

Like the White Paper before it, this newer report seems to assume without question that frequent utilization of payday loans is bad for consumers. This is reflected most clearly in Director Cordray’s statements that many payday loans become “revolving doors of debt” or “debt traps.” It appears that the CFPB may move forward with its rulemaking without studying whether payday loans are better or worse than other small-dollar credit options that consumers have, or how consumers will be affected by restricted access to payday loans. Absent such data, we expect the rulemaking process to confront a very real legal challenge.