CFPB Finalizes New Payday Lending Rule, Reversing Prior Regulation

CFPB Finalizes New Payday Lending Rule, Reversing Prior Regulation

INSIGHTi
CFPB Finalizes New Payday Lending Rule,
Reversing Prior Regulation
Updated July 10, 2020
On July 7, 2020, the Consumer Financial Protection Bureau (CFPB) released a new final rule to amend its
regulations for payday, vehicle title, and certain high-cost instal ment loans. The rule rescinds a
significant part of a 2017 final rule that requires smal -dollar, short-term lenders to determine a
consumer’s ability to repay before issuing a new loan.
This Insight begins with an overview of payday loans and then briefly summarizes the 2017 rule and
major changes finalized by the CFPB. It also reviews the data and analysis supporting these rules, and the
different conclusions each version of the rule reached using this same evidence. Although the CFPB’s rule
covers other smal -dollar markets (e.g., auto title loans and other instal ment loans), this Insight focuses
on payday loans, currently the largest market covered by the rule.
For general information on the payday loan market, see CRS Report R44868, Short-Term, Small-Dollar
Lending: Policy Issues and Implications.
Payday Loans Overview
Payday loans are designed to be short-term advances that al ow consumers to access cash before they
receive a paycheck. These loans are general y paid back on a consumer’s next payday. Payday loans are
offered through storefront locations or online for a set fee. The underwriting of these loans is minimal,
with consumers required to provide little more than a paystub and checking account information to take
out a loan. Rather than pay off the loan entirely when it is due, many consumers roll over or renew these
loans. Sequences of continuous “roll overs” may result in consumers being in debt for an extended period
of time. Because consumers general y pay a fee for each new loan, payday loans can be expensive.
In this market, policy disagreements exist around balancing access to credit with consumer protection.
Currently 17 states and DC either ban or limit the interest rates on these loans. The Dodd-Frank Wal
Street Reform and Consumer Protection Act gave the federal government—the CFPB—the power to
regulate payday loans for the first time.
Congressional Research Service
https://crsreports.congress.gov
IN11059
CRS INSIGHT
Prepared for Members and
Committees of Congress

link to page 3 Congressional Research Service
2
Regulation Changes
In October 2017, during the leadership of President Obama-appointed Director Cordray, the CFPB
finalized a rule covering payday and other smal -dollar, short-term loans. The rule asserts that it is “an
unfair and abusive practice” for a lender to make certain types of short-term, smal -dollar loans “without
reasonably determining that consumers have the ability to repay the loans,” also cal ed loan underwriting.
The rule, which mandated underwriting provisions, exempted some short-term, smal -dollar loans if made
with certain loan features.
The July 2020 rule, issued under President Trump-appointed Director Kraninger, rescinds the mandatory
underwriting provisions before the 2017 rule goes into effect. The rule maintains other consumer
protection payment provisions in the 2017 rule.
Media reports have suggested that opponents of the new rule may sue the CFPB, al eging that, by
rescinding the 2017 rule and issuing the 2020 rule without considering substantial y changed evidence,
the CFPB acted in an arbitrary and capricious manner in violation of the Administrative Procedure Act. To
successfully defend against such a chal enge, the CFPB would have to “demonstrate that it engaged in
reasoned decision-making by providing an adequate explanation for its decision” to rescind part of the
2017 rule.
Same Mixed Evidence, Different Perspectives
Notably, the new rule principal y relies on the same estimated impacts and academic research as the
former 2017 rule. In general, this evidence reflects that consumers’ experiences with payday loans are
mixed, and different CFPB leadership has weighed this evidence differently, as discussed below.
A survey of academic research suggests that access to payday loans does not have a large impact on
consumer wel being, either positively or negatively. This mixed evidence may be masking diverse effects
among consumers, where particular loans help certain consumers and harm others.
A 2014 CFPB research report finds, as shown in Figure 1, that most consumers pay off payday loans
quickly, but a sizable minority are in debt for a long period of time. In the sample, 36% of new payday
loan sequences were repaid fully without rollovers, while 15% of sequences extended for 10 or more
loans, and half of lenders’ outstanding loans consisted of loans that were a part of these long sequences.
A 2014 academic study asked consumers how long they estimate it wil take to pay back their loan. Prior
to taking out a new loan, most people expected to pay this debt off quickly. The study found that 60% of
consumers accurately estimated the time it wil take to pay back their loans, while consumers in long
sequences general y underestimated how long they wil be in debt.

Congressional Research Service
3
Figure 1. Duration of Payday Loan Sequences

Source: CFPB Data Point: Payday Lending.
CFPB’s internal analysis, which is general y the same under both rules, suggests that the 2017 rule’s
mandatory underwriting provisions would reduce new payday loan sequences by approximately 6%, but
reduce the total number of payday loans made by half. The CFPB estimates that these provisions wil lead
to a large consolidation of the payday loan industry, reducing loan volume by about 65% and reducing the
number of storefronts by 71%-76%.
The 2020 rule reflects a different understanding of the evidence underlying the mandatory underwriting
provisions than the 2017 rule. In the 2017 rule, the CFPB stated that “extended loan sequences of
unaffordable loans” lead to consumer harm. For this reason, the CFPB’s 2017 rule attempts to mandate
underwriting without “reduc[ing] meaningful access to credit among consumers.” However, in the 2020
rule, the CFPB finds that under the 2017 rule, “some borrowers might stil have been able to borrow, but
for smal er amounts or with different loan structures, and might have found this less preferable to them
than the terms they would have received.” Therefore, in the 2020 rule, although the CFPB considers the
same research, it “determine[s] that the key evidence is insufficient to support finding an unfair and
abusive act or practice as wel as warranting regulatory intervention.”

Congressional Research Service
4
Author Information

Cheryl R. Cooper

Analyst in Financial Economics

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,
as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
permission of the copyright holder if you wish to copy or otherwise use copyrighted material.

IN11059 · VERSION 5 · UPDATED