‘Financial Choice Act 2.0’ Would Eliminate Government’s Ability To Go After Shady Payday Loan Operations

Image courtesy of Adam Fagen

Even though recent surveys indicate that the overwhelming majority of Americans want more regulation of payday lending, federal lawmakers are attempting to strip the Consumer Financial Protection Bureau of any authority over these short-term, high-cost loans.

The draft legislation — dubbed the Financial Choice Act 2.0 — is a revision of the previous Financial Choice Act introduced by bank-backed Texas Rep. Jeb Hensarling last year.

The 593-page draft [PDF] aims to roll back several provisions under the Dodd-Frank Wall Street Reform and Consumer Protection Act and limit the CFBP’s ability to oversee the entire financial industry.

Among the bill’s provisions are sections that would require the agency to get congressional approval before taking enforcement action against financial institutions, restrict the Bureau’s ability to write rules regulating financial companies, and revoke the agency’s authority to restrict arbitration.

While each of these provisions aim to deregulate financial institutions, another measure would essentially move to prevent the CFPB from having any oversight over the payday lending industry.

Section 733 of the Act calls for the “removal of authority to regulate small-dollar credit.”

“NO AUTHORITY TO REGULATE SMALL-DOLLAR CREDIT — The Agency may not exercise any rulemaking, enforcement, or other authority with respect to payday loans, vehicle title loans, or other similar loans,” the Act states.

This, of course, would prevent the agency from finalizing it nearly year-old proposed payday lending reforms aimed at reducing the likelihood of borrowers needing to take out new loans to cover old ones.

The CFPB offers four protections to end debt traps: a test that companies must perform before extending credit; restrictions on rollovers; a payoff option for some products; and offering less-risky lending options.

The measure would also prevent the agency from taking enforcement action against payday, auto title, or similar lenders.

In the past, the CFPB has brought action against several payday lending companies for allegedly pushing borrowers into a cycle of debt.

For example, in July 2014, the CFPB sought enforcement action against ACE Cash Express, one of the largest payday lenders in the United States, for allegedly engaging in illegal debt collection practices in order to push consumers into taking out additional loans they could not afford.

Under the action, Texas-based ACE was required to provide $5 million in refunds to consumers on top of paying a $5 million penalty for the alleged violations.

Before that, the CFPB accused a debt collection subsidiary of Cash America of robo-signing court documents related to debt-collection lawsuits, illegally overcharging military servicemembers and their families, and trying to cover these actions up by destroying documents before the Bureau could investigate.

As a result of the investigation, Cash America was ordered to pay $14 million in refunds to consumers affected by the alleged violations.

The Washington Post reports that the Financial Choice Act is expected to be discussed in Financial Services Committee hearing next week.

Consumer advocates were quick to point out the damage the payday lending provision could do.

“I for one think that such a provision is an inexcusable giveaway to the high-cost lending industry, which has wreaked havoc on the lives of consumers living on chronically thin margins,” Suzanne Martindale, staff attorney for our colleagues at Consumers Union, tells Consumerist.

Martindale notes that the problems with payday, auto title, and other high-cost installments loans are well-documented and the CFPB has been doing important work to set better national standards for those loans.

“Taking away any authority for the CFPB to oversee these lenders is reckless, shortsighted and ultimately harmful to working families,” she said.

Other consumer advocates echoed Martindale’s sentiments, saying that Congress appears to be doing the payday loan industry’s bidding.

“It’s a shocking provision,” Diane Standaert, director of state policy for the Center for Responsible Lending, tells Consumerist. “Payday lenders charge triple-digit interest rates and Congress is proposing to give them a free pass.”

Standaert also notes that the provision is in direct contrast to consumer groups and borrowers’ desire for more protections, adding that more than 425,000 people have submitted comments in support of the CFPB’s proposed rules.

“This is provision is the exact opposite direction of what people in the country are asking for,” she tells Consumerist. “We hope that congress does not block efforts to rein in the practices.”

As previously reported, Hensarling’s revisions and original legislation targeting the CFPB aren’t entirely a surprise, as he — and the Financial Services Committee he leads — has strong ties to Wall Street and big banks.

For example, Allied Progress noted in a February report that more than a dozen current and former House Financial Services Committee staffers either worked in the financial industry before joining the committee or have left the committee to work in the industry.

The report also found that Hensarling has personally accepted at least $7.38 million from companies regulated by the CFPB.

According to the Center for Responsive Politics, the top 20 contributors to Hensarling’s committee and PAC from 2015 to 2016 includes a number of major banks. In the top four alone, JPMorgan Chase contributed $25,200, Bank of America provided $25,000, Goldman Sachs contributed $22,700, and the American Bankers Association contributed $22,000.