America's First Consumer Financial Watchdog Is on a Leash: Can the CFPB Use its Authority to Declare Payday Loan Practices Unfair, Abusive, and Deceptive?

Creola Johnson, Ohio State University Moritz College of Law

Abstract

ABSTRACT The Dodd-Frank Wall Street Reform and Consumer Protection Act creates an independent federal agency, called the Bureau of Consumer Financial Protection (“CFPB”), and empowers it to regulate consumer financial products or services. Several federal lawmakers, however, have introduced bills designed to limit the effectiveness of the CFPB, and thereby put America’s first consumer financial watchdog on a tight leash. The CFPB’s regulatory intervention is, nevertheless, needed because non-banks, and now major banks such as Wells Fargo, are expanding their payday loan products. This loan product, which typically carries a triple-digit interest rate and must be repaid in a single balloon payment in 14 days or less, is considered one of the most dangerous consumer credit products on the market today. The Food and Drug Administration (“FDA”) would not allow a dangerous drug to stay on the market even if the drug’s manufacturers placed crystal clear, plain-language disclosures in the drug packaging about the high risks of serious injury or death. Yet some federal lawmakers and banking regulators think that it is acceptable to allow banks and non-banks to flood low-to-moderate income communities with payday loans. The CFPB has the chance to act like the FDA and protect consumers from payday loans. The CFPB, which has broad rulemaking authority over all financial institutions providing payday loans, should exercise it to declare several payday loan practices are unfair, deceptive, and abusive. Although the CFPB is explicitly prevented from establishing a national usury limit, such as the 36 percent APR cap imposed by several state statutes, it should pass a regulation making it unlawful for any lender to charge an interest rate in violation of applicable laws. The CFPB should also establish regulations that define payday loans and expand the definition of entities subject to regulation to deal with the trend among lenders to use subterfuges to circumvent applicable laws. Finally, the CFPB should declare as unfair, deceptive, or abusive the following practices: short maturity dates, single balloon payments, multiple rollover/refinancing fees, multiple back-to-back loans, and repetitive electronic bank account access. These practices inflict substantial injury on consumers and hinder the payday loan market from becoming fair and competitive.