The Consumer Financial Protection Bureau’s proposed payday lending rules would crush an existing legal industry but could benefit a Google-backed startup.
CFPB Director Richard Cordray says the agency is proposing “a rule aimed at ending payday debt traps by requiring lenders to take steps to make sure consumers have the ability to repay their loans rule to end payday debt traps.”
In a press release, the CFPB stated “The proposed ability-to-repay protections include”:
(1) “A ‘full-payment’ test that would require lenders to determine upfront that consumers can afford to repay their loans without reborrowing.”
(2) “A ‘principal payoff option’ for certain short-term loans and two less risky longer-term lending options so that borrowers who may not meet the full-payment test can access credit without getting trapped in debt.”
(3) A requirement that “Lenders …use credit reporting systems to report and obtain information on certain loans covered by the proposal.”
(4) A limit on “repeated debit attempts that can rack up more fees and make it harder for consumers to get out of debt.”
The rule will now be subject to a period of public comment for several months, after which CFPB is expected to finalize it.
“The CFPB’s proposed rule presents a staggering blow to consumers as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense,” Dennis Shaul, Chief Executive Officer of the Community Financial Services Association of America (CFSA) said.
“From the beginning this rule has been driven – and in some instances written – by self-proclaimed ‘consumer advocacy’ groups who have sought to eliminate payday lending. The bureau took up the advocates’ agenda, relied on non-quality research, and conducted a rulemaking process while maintaining an already hardened and biased view of payday loans and how consumers use these products,” CFSA’s Shaul said.
“In the best interest of consumers, the bureau should have determined the true impact of payday loans on consumer welfare. Instead, the bureau has prescribed a rule that fits its pre-determined conclusions and will actually harm consumers’ financial well-being,” he added.
CFSA describes itself as “the only national organization dedicated solely to promoting responsible regulation of the payday loan industry and consumer protections.”
As Breitbart News reported previously, “The CFPB was as established as a virtually unaccountable and independent agency within the Federal Reserve Board when Congress passed the Dodd-Frank Act in 2010.”
President Obama originally nominated current Senator Elizabeth Warren (D-MA) to serve as the agency’s initial director. But in January 2012, when it became clear she would not be confirmed by the Senate, Obama placed current director Richard Cordray in the job using a controversial recess appointment. Though Cordray was ultimately confirmed by the Senate a year and a half later (in July 2013), he is considered by many to be as liberal, if not more, than Senator Warren.
CFSA’s Shaul says the effect of this rule will dry up the availability of short term lending to those who need it most.
“By the bureau’s own estimates this rule will eliminate 84 percent of loan volume thereby creating financial havoc in communities across the country. Thousands of lenders, especially small businesses, will be forced to shutter their doors, lay off employees, and leave communities that already have too few options for financial services,” Shaul noted.
But LendUp, a startup backed by Google Ventures and a pantheon of heavy hitter Silicon Valley venture capital firms, supports the proposed new rule, which would give it a government created competitive advantage.
“As a mission-driven startup committed to redefining the way underbanked consumers access financial services, LendUp shares the CFPB’s goal of reforming the deeply troubled payday lending market,” LendUp CEO and co-founder Sasha Orloff said in a statement.
“While we are still reviewing the full proposal and will need some time to determine its full impact, we fully support the intent of the newly released industry rules,” Orloff, “was inspired by a book he read by Nobel Peace Prize winner Muhammad Yunus, Banker to the Poor: Micro-Lending and the Battle Against World Poverty, and decided to give up his job [in a Silicon Valley technology startup] to volunteer with nonprofits, spending time in Honduras and Mexico,” continued.
Thursday’s CFPB press release uses the same “debt trap” language Orloff used himself in a 2016 interview with TechCrunch:
“What’s the most horrible product on the market?” The answer will be familiar to anyone living in a low-income area. The payday loan. It’s a same-day infusion of a few hundred bucks for people who need money to pay bills or want cash but don’t have good enough credit to get a traditional loan.
“It’s a debt trap. The average loan size is $400, but you pay less than the fees on the interest due so the amount you owe gets bigger and bigger. They’re called ‘rollovers’” Sasha [Orloff] says, exasperated. “They’re framed as convenient but they’re very dangerous to consumers.”
Orloff has made it clear his goal is to put his payday lending competitors out of business:
Funnily enough, LendUp’s first office was above one of those exploitative payday loan places. Sasha says he’d walk by it each day whispering under his breath, “you’re going out of business.” Now he has the firepower to make that dream come true while unshackling people from debt along the way.
Remarkably, the 84 percent reduction in loan volume CFSA’s Shaul anticipates the rule will cause appears to mirror LendUp’s own early business model:
With small loan amounts and repayment windows, LendUp aims to improve credit scores for clients with poor or no credit. Loans can range anywhere between $100 and $250, and recipients can repay LendUp between seven and 30 days.
Currently, LendUp, which was founded in 2011, said it approves about 15% of loan applications it receives. For the other 85% that aren’t approved by LendUp, the company connects them to local non-profit lenders that might be able to help. This will still give would-be clients a chance to build their credit portfolio, the founders said. The first non-profit that they are teaming with isJustinePetersen.org, local credit builder based in St. Louis, MO.
“We want to use them as a shining example of how technology can help make a community better,” Orloff told Inc.
While the founders said there are no rollovers or hidden fees in their loans, LendUp will charge a small interest rate–starting at 15% of the loan. The longer recipients wait to pay their loan back, the higher the interest rate becomes. Users can lower their interest rates however, if pay their loans ahead of schedule or take classes on good credit, financial planning, and more, TechCrunch reported.
Orloff believes the proposed CFPB is a good fit with LendUp’s current business model.
“As it summarizes its concerns, the CFPB criticizes payday lenders’ business models that ‘deviate substantially from the practices in other credit markets.’ We couldn’t agree more,” Orloff said.
“ That is precisely why we built the LendUp Ladder to lower rates over time for successful borrowers. High-cost debt cycles have defined the short-term lending space for far too long and businesses need to align their success with that of their customers,” he noted.
Orloff also cheered on the CFPB’s regulatory direction.
“Equally important, we welcome the CFPB’s new emphasis on stronger underwriting and credit risk evaluations—something our business has invested in since day one. We also applaud its efforts to enforce compliance with existing laws and regulations, including electronic fund transfer laws.” Orloff said.
Orloff also joined CFPB in painting LendUp’s payday lending competitors as morally inferior.
“While we know there are some in the industry who will characterize these changes as ‘the end’ of short-term lending, we believe it is disingenuous to say curbing predatory practices equates to restricting access to credit—in fact, we know that’s not the case, because many of the protections the CFPB is calling for are already part of LendUp’s DNA,” Orloff proclaimed.
“We believe the intent of these new rules points to a critical reset in ensuring a safe and functioning credit market for underbanked consumers, and we look forward to working with the Bureau and other key stakeholders to finalize them,” the LendUp CEO added.
One of the largest payday lenders in the country, Advance America, “the country’s leading provider of non-bank cash advance services, with approximately 2,400 centers across the country,” adamantly opposes the proposed new CFPB rules.
“The CFPB’s proposed rules are a direct threat to millions of Americans’ access to affordable, transparent and reliable credit,” Jamie Fulmer, Senior Vice President of Advance America, said on Thursday in a statement.
“For the already highly-regulated businesses that offer these consumers’ preferred credit option, particularly smaller lenders, they are a death sentence,” Fulmer added.
“The Bureau has disregarded the views of small businesses, policymakers and – most importantly – the people who actually use these loans,” he said.
“The resulting rules will leave consumers with even fewer options to responsibly manage their finances, and will instead push them into the arms of unregulated lenders or more expensive options, such as bank overdraft programs,” Fulmer concluded.
The CFSA’s Shaul agrees.
“The Federal Reserve reported last week that forty-six percent of Americans cannot pay for an unexpected $400 expense. What is missing in the bureau’s rule is an answer to the very important question, ‘Where will consumers go for their credit needs in the absence of regulated nonbank lenders?’” CFSA’s Shaul asked rhetorically.
“The bureau’s rule does nothing to address the ongoing problem of illegal lenders in this market. A borrower’s experience with a payday loan depends greatly on whether they borrow from a legal, licensed lender or an illegal, unlicensed lender. The two are not equal options, and this is apparent in borrower surveys and the bureau’s own complaint data,” Shaul said.
As The Intercept reported recently, “Small-dollar loans have become massively popular in America, perhaps because an estimated 47 percent of Americans are in such precarious financial shape that they would have trouble coming up with $400 in an emergency, according to Federal Reserve data.”
“Auto title loans use a borrower’s car as collateral, subjecting them to repossession if they default. Over 12 million Americans use payday loans and similar products each year,” The Intercept noted.
As Breitbart News reported, Google executives have visited the Obama White House a record 427 times during the president’s two terms.
There is no evidence that Google influenced CFPB’s current payday lending rule making process directly, but the strategic alignment between the CFPB’s proposed rule and the business model for Google backed LendUp is apparent.
The relationship between Google and the Obama administration is exceptionally close, as The Intercept reported:
[D]irect expenditures on lobbying represent only one part of the larger influence-peddling game. Google’s lobbying strategy also includes throwing lavish D.C. parties; making grants to trade groups, advocacy organizations, and think tanks; offering free services and training to campaigns, congressional offices, and journalists; and using academics as validators for the company’s public policy positions. Eric Schmidt, executive chairman of Alphabet, Google’s parent company, was an enthusiastic supporter of both of Obama’s presidential campaigns and has been a major Democratic donor.
For its part, the Obama administration — attempting to project a brand of innovative, post-partisan problem-solving of issues that have bedeviled government for decades — has welcomed and even come to depend upon its association with one of America’s largest tech companies.
Last month, Google took its own shot at the payday lending industry, a precursor of sorts to this week’s CFPB rule proposal, announcing that it will ban any advertising for loans that are due in 60 days or less:
Google’s payday ad ban was “designed to protect our users from deceptive or harmful financial products,” David Graff, Google’s director of global product policy noted in a blog post last week.
Under Google’s new policy, which goes into effect July 13, it will no longer accept online ads for loans that are due within 60 days and, in the United States, loans with an annual percentage rate of 36% or higher. The ban does not effect companies offering traditional loans, such as mortgages, car loans, student loans, commercial loans, and revolving lines of credit such as credit cards, Google noted. The ads are extremely lucrative for Google, with lending ranking among the most expensive categories for online advertisers.
LendUp’s Orloff enthusiastically endorsed Google’s ad ban:
“Because we offer short-term loans and charge high interest rates in the beginning, the entry point to the LendUp Ladder will be blocked from paid advertising on Google,” CEO Sasha Orloff wrote in a post on Medium.
But Orloff wrote that he still supported Google’s decision, which he said would pressure his less ethical competitors to clean up their act.
“The marketing of these products has to change to better protect consumers from deceptive practices, illegal products and identity theft,” Orloff wrote. “If effectively enforced, Google’s ban will push the payday loan marketing competition away from ads and toward natural search, where safer alternatives with quality content can shine. Obviously, I think that’s good for LendUp — and good for Americans who are locked out of the banking system.”
Last year, Sen. David Perdue (R-GA) introduced legislation to rein in the CFPB, the Consumer Financial Protection Bureau Accountability Act of 2015.
“The Consumer Financial Protection Bureau was spawned from the disastrous Dodd-Frank financial regulation law,” Perdue explained.
“Right now, the CFPB is a rogue agency that dishes out malicious financial policy and creates new rules and regulations at whim without real Congressional oversight,” Perdue added.
Perdue’s legislation has not yet made it out of the Senate Committee on Banking, Housing, and Urban Affairs.
Lacking a huge public outcry in opposition to the proposed new CFPB payday lending rule, the Obama administration’s ongoing efforts to pick winners and losers in the economy is likely to gain more traction if the CFPB, as is expected, approves and finalizes the proposed payday lending rule some time before the end of 2016.