State and federal regulation of payday lenders is far from a new phenomenon. Recently, litigation against entities using the “tribal lending” model, and government attempts to suppress certain online lending programs via Operation Chokepoint have put the spotlight back on industry. In past articles, we have noted that the Consumer Financial Protection Bureau (CFPB) was preparing to impose further regulation on payday lenders. Recently, New York Department of Financial Services (DFS) Superintendent, Ben Lawsky, who has been very active in encouraging banks to sever ties with its payday lending customers, wrote the CFPB to voice support for strict regulation of payday lenders, and in particular to advocate for four areas such regulation might cover: (1) delineation between state and federally imposed standards, (2) prohibition of remotely-created checks, (3) restriction of sharing personally identifiable information (NY has also been a leader in proposing privacy and data security rules for business in the financial services sector, as we noted here), and (4) imposition of ability-to-repay standards.
In his letter, Lawsky noted that New York is one of several states that prohibit payday lending, and DFS has taken a number of steps to curtail the practice. One of the steps DFS has taken is to focus on entities located outside of New York by issuing cease and desist letters to online payday lenders whose customers included individuals in New York. This strong stance evinces a clear desire to retain ultimate control over regulation of payday lending to New York residents. Consistent with that goal, DFS has asked the CFPB to clarify that its regulations are a floor, and not a ceiling.
Additionally, DFS has asked the CFPB to use its regulatory authority to ban the use of remotely created checks. In its letter, DFS asserts that remotely created checks—checks drawn electronically using the account number of the account-holder—allow payday lenders to circumvent state regulations, and to withdraw funds from the accounts of consumers without authorization.
DFS also suggested promulgating regulations restricting the sharing of borrower’s personal information. Although DFS did not explain what such a regulation would entail, it appears that DFS’ primary concern is the sharing of borrower information between lead generators and payday lenders.
Finally, DFS requested promulgation of an “ability-to-repay” standard. DFS did not recommend a particular standard, but as the name suggests, such a standard would consider a number of factors related to potential borrower’s financial ability to repay.
Lawsky isn’t alone in his commentary on what the CFPB’s forthcoming regulation on payday lending should cover, however. House Republicans also weighed in, with 12 members sending their own letter to the CFPB, which offered some additional principles that should guide the CFPB in adopting rules for payday and short-term loans, including:
- Base any rulemaking on quality and transparent data and tested research, not anecdotes or rhetoric; and conduct a cost-benefit analysis of new regulation;
- Consider the impact of the new rules on small businesses and rural communities, and do not cripple neighborhood financial centers with extensive compliance costs (as opponents of an ability-to-repay standard have argued would be the case if such standard is adopted); and,
- Look to states where payday lending is legal and well-regulated as a model for regulation that will balance business needs and consumer protection.
The CFPB is widely expected to issue its regulations later this year.