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Turning its name into a cruel joke, the federal Consumer Financial Protection Bureau is planning to pull back important regulations on lenders who prey on people who struggle to make it from one paycheck to the next.
Under President Barack Obama, the CFPB came up with tough rules designed to protect the most vulnerable borrowers from the all too common trap of short-term, high-interest loans that turn into a monster of ballooning debt.
One rule would have required the lenders to verify that borrowers have the ability to repay their loans. Another would have limited the number of times borrowers could “roll over” their loans — taking out a new loan to pay off the first, adding fees and interest each time. These loans can have annual interest rates as high as 400 percent.
The rules would have applied to the payday lenders who give people high-interest loans that they are supposed to pay back when they get paid and also to variations such as loans secured by the title to the borrower’s vehicle. When, as often happens, the borrowers cannot afford to pay off the loan immediately, interest and fees quickly mount. A loan of a few hundred dollars can turn into a debt of thousands that might not be paid off for years, if ever.
The lenders take advantage of the working poor. Often, they set up shop near military bases, preying on young, inexperienced troops or struggling veterans.
When the rules were announced, Obama warned the lenders: “If you’re making that profit by trapping hardworking Americans into a vicious cycle of debt, you’ve got to find a new business model.”
Unfortunately, the Trump administration is now signaling that the ruthless old model is just fine.
The rule requiring lenders to make sure borrowers could repay their loans was supposed to take effect in 2018.
But Trump made it clear that protecting vulnerable consumers was not in his plans. He named Mick Mulvaney, who as a congressman from South Carolina had tried to abolish the bureau, as its acting head.
Mulvaney delayed implementation of the rule, and now the new CFPB head, Kathy Kraninger, is proposing to scrap it, along with the rule to limit the number of rollover loans.
The CFPB offers various rationales. The rules would reduce competition in the lending industry, it says. They would make it hard for people who need money to get loans, it says. There’s not enough evidence that payday lending is unfair, it says.
These arguments ring hollow. People shouldn’t borrow money they aren’t going to be able to repay, especially if the failure to repay means their debt will mushroom.
North Carolina’s leaders realized years ago how harmful payday lending is. They banned it in 2001, but ever since the state has had to guard against lenders exploiting loopholes and out-of-state lenders offering online loans.
When consumer protections are weakened, the lenders are likely to devise new ways to prey on the working poor.
The CFPB was created in response to the 2008 financial crisis and the recession. It is supposed to be an independent watchdog agency to protect consumers from lenders and financial institutions that would take unfair advantage of them.
But the bureau now seems to be intent on protecting unscrupulous lenders rather than the people who need its help.