State AGs Must Fill The CFPB Void, But That's Not Enough

By Attorney General Karl A. Racine, originally appearing in Law360.

Recently, the Consumer Financial Protection Bureau successfully sued a group of companies that had flagrantly violated usury laws in several states. Lawyers for the agency alleged that NDG Financial Corp. and associated businesses had run “a cross-border online payday lending scheme” that not only charged interest rates well above state legal limits but used “unfair, deceptive, and abusive practices to collect on the loans and profit from the revenues.” A federal court entered a default judgment against several of the uncooperative defendants, and the rest of the suit was pending.

But then Mick Mulvaney, President Donald Trump’s interim CFPB head, not only dropped the lawsuit, but announced in a report to Congress that he is dropping sanctions against the parties that the court had already judged at fault.

That’s just one example of Mulvaney letting alleged law violators in the industry get away scot-free. In March, Reuters reported that, under Mulvaney, the CFPB did an abrupt about-face in its pursuit of another payday lender, National Credit Adjusters, and was considering backing off on three other suits that had been approved under the previous CFPB director, Richard Cordray. Those cases alleged abusive business practices and sought $60 million in restitution for consumers.

Perhaps this is what we should expect from a CFPB run by Mulvaney — who in his previous life as a Republican congressman from South Carolina received more than $60,000 in donations from the payday lending industry and who recently told a group of bankers (according to the Washington Post) that when he was in Congress, he only listened to lobbyists who had given him money. But where does that leave the consumers the CFPB is intended to protect?

Payday loans are taken out by consumers who need fast cash to make ends meet. They are usually due in two weeks, and are tied to the borrower’s paycheck cycle. Industry leaders claim that the loans are designed to help consumers cover unexpected or emergency expenses — but the reality is that these loans, especially when loosely regulated, often drag people into ongoing debt when they can least afford it. And the industry has a perverse incentive to keep it that way.

According to the Pew Charitable Trusts, payday borrowers are disproportionately low-income and living on the edge: The average annual income of a payday borrower is about $30,000, and 58 percent have trouble meeting their monthly expenses. Indeed, seven in 10 payday borrowers use the loans to cover basic expenses like rent and utilities, not extraordinary expenses. And doing so buries them in revolving debt: The average payday loan borrower is in debt for five months of the year and spends an average of $520 in fees to borrow an average of $375. 

With $9 billion in interest and other fees on the line, according to Pew research, it’s obvious why the industry wants to keep milking lower-income people of as much cash as possible.

While Cordray was at the CFPB, the agency proposed a new regulation that would better protect consumers from the industry’s worst practices. The rule would have required payday lenders to ensure that a consumer could actually afford a payday loan before issuing it. The rule would also have limited the number of times a lender could “roll over” payday loans — thereby making it more difficult for the lower-income consumers who make up the vast majority of payday borrowers to get caught in endless cycles of revolving debt.

After taking over the agency, Mulvaney put that rulemaking on hold, while the Senate considers killing it altogether. Meanwhile, payday lenders are circling the courts, armed with lawsuits seeking to block the rule. 

Without a national rule, consumers would be left to the mercies of state legislatures and regulators. That might be fine for the residents of the District of Columbia, where we cap effective interest rates at 24 percent (largely outlawing payday lenders). But in the 36 states with no effective anti-usury laws, payday loans are available at unconscionable average annual interest rates (per the Pew Charitable Trusts) of 391 percent. Moreover, payday lending on the internet is increasingly common, meaning that the District of Columbia and states with strong usury laws must often go to great lengths to pursue out-of-state lenders who have unlawfully taken advantage of our residents.

This is why we need a strong national voice for protecting all consumers. The original vision of the CFPB was to be that advocate in the financial services industry, instituting nationwide regulations and bringing enforcement powers to bear against payday lenders and other companies that abuse consumers.

When the CFPB plays this role, I and other attorneys general have a partner with which we can more effectively confront abusive business practices within our borders and win relief. For example, the CFPB filed suit against an online payday lender — CashCall — that unlawfully operated in the district and other states that outlaw payday lending. My office also filed a suit against CashCall alleging that the lender had violated district laws by charging consumers interest rates that ranged from 80 to 169 percent.

The CFPB won a ruling in 2016 that CashCall was guilty of deceptive and abusive business practices, and our office recently settled our lawsuit against CashCall, gaining nearly $3 million in restitution and debt forgiveness for consumers in the district.

Payday lending is far from being the only area where the CFPB’s national leadership has proved invaluable. Since the agency began operations in 2011, it has handled more than a million consumer complaints and returned nearly $12 billion to the pockets of more than 29 million consumers wronged by financial institutions — five times more than the agency itself costs taxpayers to fund. The CFPB has reached multiple settlements with banks, debt collectors and other predatory lenders that harmed consumers.

It also took the strategic lead on regulating other key industries that preyed on vulnerable consumers. For example, partnering with several state attorneys general, the CFPB took action against a number of predatory for-profit colleges, forcing them to pay restitution to consumers the schools lured in with unrealistic promises of a degree and gainful employment.

Now, with Mulvaney gutting the CFPB and giving more leeway to financial miscreants in the name of Mulvaney’s new “strategic priorities” to “recognize free markets and consumer choice,” the burden of standing up to giant, deep-pocketed financial institutions falls more heavily on state attorneys general with the resources and willingness to stand up for the consumers they serve.

One way attorneys general are stepping up is in joining amicus briefs opposing Mulvaney’s appointment as interim director and seeking to preserve the CFPB’s independence in the wake of Mulvaney’s support for turning the agency into yet another political pawn for Congress and the White House. We will be stepping up our efforts to safeguard consumers in other ways as well by bringing individual and multistate suits against financial services companies that harm consumers.

But, in the end, such efforts are by nature piecemeal and can’t replace the power the CFPB has to protect consumers across all states equally. Our end goal must be to be to pull the CFPB back to its original mission and away from subservience to the financial services industry and its army of well-heeled lobbyists. We cannot in good conscience abide businesses operating on a model of keeping consumers trapped in a web of indebtedness while an agency that has “consumer financial protection” in its name decides its strategic priority is to no longer financially protect consumers.