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Federal watchdog sets rules for payday loans

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The agency’s new director has reversed course on regulations aimed at preventing borrowers from being caught in a never-ending cycle of short-term, high-interest loans.

Payday lenders won a major victory on Wednesday after the Bureau of Consumer Financial Protection decided to remove tougher restrictions that were due to come into effect later this year.

The industry has spent years trying to push back against the new rules, which were crafted under the Obama administration. The settlement was aimed at preventing debt skyrocketing by limiting the number of back-to-back loans that could be made and requiring lenders to verify that borrowers could repay their loans on time while covering basic expenses.

In her first major policy decision, the new office manager, Kathleen Kraninger, proposed eliminating almost all substantive requirements from the regulations, including the “repayment capacity” mandate. There was “insufficient evidence and legal support” for this provision, the office said. He also sought to remove a limit that would have prevented lenders from granting more than three short-term loans without a 30-day cooling off period.

A payday loan client who borrows $ 500 is typically expected to be around $ 575 two weeks later, or an annual percentage rate of almost 400%. If borrowers cannot repay their loans on time, they often borrow more and go into more debt. It’s a tough cycle to break: Half of all payday loans are part of a streak that spans at least 10 consecutive loans, according to data from the Office of Consumer Affairs.

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Consumer advocates said the overthrow of the bureau put the interests of businesses ahead of the public.

Linda Jun, senior policy advisor at Americans for Financial Reform, questioned whether the change was simply a result of the industry making enough noise.

“It’s not like the agency wrote the old rule on a whim,” she said. “It was the result of a five-year process, with a lot of research and conversations with stakeholders on all sides. Essentially saying “just kidding” and throwing it aside is extremely baffling. “

Payday loans are indeed illegal in about 20 states, but in the rest they are profitable and popular: Americans borrowed nearly $ 29 billion from payday lenders in 2017, paying $ 5 billion in fees, according to estimates by John Hecht, financial services analyst. Jefferies company.

To prevent borrowers from getting trapped in a cycle of debt, the office finalized new national rules at the end of 2017. The rules were the result of years of research and legislative work – and have been fiercely opposed at every step by lenders, who have warned that the new restrictions will decimate their business. Industry officials have said many of the country’s 14,300 payday lender stores – about the same number of U.S. locations as Starbucks – are expected to close.

The centerpiece of the settlement was its requirement that lenders underwrite most loans by checking borrowers’ income and debts to determine if they could afford to repay the loans while meeting other financial obligations. Granting loans that consumers did not have the income to repay was “unfair and abusive,” the consumer office said at the time.

But under President Donald Trump, the agency has changed course and been more friendly towards the companies it regulates.

In June, acting director of the office of consumer affairs Mick Mulvaney, who is now Trump’s acting chief of staff, sided with two business groups and called on a judge to prevent the new rules. enter into force this year. On Wednesday, the agency sought to postpone the effective date of the underwriting provision to the end of 2020 from August, which gave it time to complete the administrative steps required to cancel it. Delaying the requirement would preserve at least $ 4 billion in sales that lenders would otherwise lose, the office said.

The office said it would leave some less important parts of the rule in place. In particular, lenders will no longer be allowed to attempt to withdraw funds from a borrower’s account after two failed collection attempts, a practice that often leaves insolvent clients inundated with overdraft fees.

Lenders welcomed the changes, but said they wanted the office to go further. The Community Financial Services Association of America, a trading group that filed a lawsuit last year in federal court to end all new restrictions, said it was happy the office was fixing some of the “critical flaws” of the rule, but that problems remained.

The limits on payday loans “will push consumers towards dangerous and harmful alternatives,” said Dennis Shaul, chief executive of the group. The trade group will continue litigation to overturn the rules, he said.

The agency has punished several payday lenders since Kraninger took office in December, although it released them with relatively light financial penalties.

Last month, the bureau punished Enova, which operates online lender CashNetUSA, for failing to honor promised loan extensions and for debiting customers’ bank accounts without authorization. Enova, which made $ 29 million last year on sales of $ 843 million, agreed to change its practices and pay a fine of $ 3.2 million.

The office’s new proposal will be open for public comment for 90 days. After that, the agency can go ahead to make the changes final.

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