Rolled Over: How the Trump Administration is Failing to Protect Civilians and Military Service Members from Predatory Payday Lending.

• Date: 01 January 2020
• Author: Martin, Zackary A.

1. INTRODUCTION 573 II. BACKGROUND 574 A. History of the Payday Loan Industry and Demands for 574 Regulation B. State Regulation of the Payday Loan Industry 576 C. Using the Truth in Lending Act Against Payday Lenders 576 D. Protecting Our Armed Service Members and Passing the MLA 577 E. Creation of the CFPB and the Regulations of Payday 578 Lenders F. The Election of Donald Trump and a Sea of Change at 579 the CFPB G. Mulvaney's Changes to the 2017 Payday Rule 582 H. Defunding of the CFPB 584 I. Industry Insiders Infiltrate the CFPB 584 J. The CFPB's Rollback of MLA Enforcement 586 III. ANALYSIS 587 A. Impact of Payday Lending on Military Members 587 B. Impact of Payday Lending on the General Public 590 IV. RECOMMENDATION 592 A. Abandon Plans to Weaken the Military Lending Act 592 B. Extend Military Lending Act Protections to All Americans 593 C. Return the CFPB to its Pre-Trump Administration Budgetary 593 Status D. Maintain the Substance of the 2017 Payday Rule While 594 Also Making the Regulations More Accessible to Consumers and Lenders E. Create Board of CFPB Directors to Ensure Status as an 594 Independent Agency V. CONCLUSION 595 I. INTRODUCTION

   The issue of payday loan industry regulation is not just of importance to the lenders within the industry and the state and federal agencies tasked with protecting borrowers; the general public has a keen interest in protection from predatory practices by payday lenders, as well. This is particularly pressing because, often, members of society that fall on the lower end of the socio-economic ladder--including members of our armed services--are the ones who suffer the consequences when industry excesses are not checked by government regulations. This Note seeks to examine efforts by the Trump Administration to roll back protections from predatory lending practices for consumers--even the special protections created for military service members under the George W. Bush Administration. This Note then proceeds to recommend how subsequent administrations, as well as Congress, should restore and expand these necessary protections.

   Part II of this Note provides background information about the payday loan industry and how it was regulated prior to the Trump presidency. This includes examining the usury practices of many payday lenders, which led to calls for regulation, and two decades of regulation at the state and federal level, including enforcing the preexisting Truth in Lending Act (TILA) against payday lenders, the passage of the Military Lending Act (MLA), and the creation of the Consumer Financial Protection Bureau (CFPB). Part II will also explore efforts by the Trump Administration to cut back on consumer protections, from industry insiders vying for positions as regulators, to the CFPB's lack of financial resources and gutting of proposed regulations, and proposals to roll back special protections afforded armed service members by the MLA. Part III will examine the negative impacts unregulated payday lending can have on both military servicemembers and the public-at-large.

   In Part IV, this Note recommends future administrations not follow the Trump Administration proposal to cut back enforcement efforts of the MLA. This Note also recommends that Congress extend MLA protections to all Americans. Future administrations should also return the CFPB to its pre-Trump Administration budgetary, regulatory, and independent status. Further, this Note recommends the substance of the 2017 Payday Rule be maintained, and for Congress to amend the CFPB's structure to create a board of directors as opposed to one agency head.

2. BACKGROUND

   1. History of the Payday Loan Industry and Demands for Regulation

      Payday lending's emergence as a booming business in the United States is a relatively recent development. (1) The industry boasts impressive financial numbers nonetheless. (2) In 2014, payday lenders extended $45 billion in loans, collecting just shy of $9 billion in fees on those loans. (3) Payday lending expansion over this time period was thanks, in part, to actions by the federal government in the 1970s and 1980s to deregulate federally insured lenders, making them effectively immune from state usury interest laws. (4) Many of the industry practices that followed not only shed light on why payday lending has become so lucrative, but also demonstrate the need for regulation. (5)

      When payday lending first emerged in the 1980s, payday lenders claimed to be providing a "short-term financial solution for families low on cash." (6) Over time, this claim was rebuffed by industry insiders when Dan Freehan, CEO of Cash America--a payday lender with over 900 locations in 20 states (7)--explained at an industry conference in 2007: "[T]he theory in the business is you've got to get that customer in, work to turn him into a repetitive customer, long-term customer, because that's really where the profitability is." (8)

      Though this may be out of step with the industry's purported mission, Freehan's empirical observation is supported by the statistic that 90% of payday lending business comes from borrowers who have taken out five or more loans per year. (9) Repeat borrowers account for such a large portion of the industry's business because payday lenders will not accept partial payments. (10) This practice results in borrowers agreeing to refinance and rollover loans on terms which include interest rates leading the borrower to owe far more than the original amount of the loan. (11)

      This process, often referred to as a "debt treadmill," (12) causes borrowers to suffer serious financial harm, struggle to pay their monthly bills, and even lose utility services. (13) Some borrowers find their only reprieve from this "debt treadmill" is to file for bankruptcy. (14) A study conducted in Texas shows payday loan borrowers are 88% more likely to file for bankruptcy than members of the general population. (15) This is likely the result of, as Professor Creola Johnson points out while lamenting rollover loans, "the payday-loan industry's business model and practices depend[ing] on ensnaring consumers via repetitive access to their bank accounts and multiple rollovers and loans." (16)

      These negative outcomes led to calls for regulation, and some, like Senator Richard Durbin (D-IL), have characterized the industry as predatory. (17) "Payday lenders are legal loan sharks that offer small, short-term loans at interest rates of 100, 500, even 1,000 percent." (18)

   2. State Regulation of the Payday Loan Industry

      In the absence of overarching federal legislation regulating the payday loan industry, many states took matters into their own hands. (19) According to Pew, 15 states have "restrictive" laws that do not allow for payday loan storefronts. (20) One of the most restrictive state statutes is Georgia's, under which no payday lenders currently operate in the state. (21) Other states, like Massachusetts, make payday lending de facto illegal by having a relatively small cap on interest borrowers can charge. (22) Other states, like New York, have similarly limited the interest rates lenders may charge, (23) but still face the challenge of enforcing these laws against online vendors. (24) Thus, it is not surprising that the New York Attorney General's Office state payday lenders can only be excluded through "conspicuously aggressive enforcement." (25)

      Not all Americans are adequately protected by strict payday lender regulations. For example, South Dakota does not restrict the term of the loan, or regulate the fees lenders can charge to refinance. (26) In addition, South Dakota law allows for four loan rollovers. (27) These are dreaded rollovers which lead to the financial turmoil described by Professor Johnson. (28) Such inconsistent "patchwork" legislation among the states leads to the conclusion that federal laws would provide greater uniformity. (29)

   3. Using the Truth in Lending Act Against Payday Lenders

      In 1968, Congress passed the Truth in Lending Act (TILA) with the express purpose of "assur[ing] a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit." (30) Courts have consistently held that TILA is applicable against payday lenders--meaning lenders must comply with TILA's disclosure requirements. (31) As such, lenders must disclose loan terms, including Annual Percentage Rates (APR), and provide certain advertising disclosures. (32)

      If a payday lender fails to comply with TILA requirements, borrowers may have a cause of action against the lender and could recover damage awards. (33) Actions pursuant to TILA may be brought in any united States District Court, either by an individual or as a class action--though statutory damages for an individual claim are limited to $2000. (34) However, as TILA enforcement actions are a civil matter, (35) counsel is not available for those who cannot afford it. (36) This is particularly relevant because households making less than $40,000 per year are three times more likely to utilize payday loans than households making more than $50,000 per year. (37) Thus, a lack of counsel leaves most payday borrowers ill-equipped to pursue their claims in court. (38)

   4. Protecting Our Armed Service Members and Passing the MLA

      Against the backdrop of state law and TILA's shortcomings to curb predatory lending practices, military commanders lobbied lawmakers in the early 2000s to offer further protections for troops. (39) This was the result of a substantial number of soldiers becoming trapped on the debt treadmill. (40) A 2006 Department of Defense report examined the effects of payday loans, (41) concluding payday lending "harms the morale of troops and their families, and adds to the cost of fielding an all volunteer fighting force." (42)

      At the urging of the Department of Defense, Congress took swift action, enacting the Military...