After a years-long battle, the Consumer Financial Protection Bureau has rolled back a series of proposed limitations to payday loans in a move advocacy groups call a "grave error" that could potentially trap vulnerable people in debt.
The CFPB announced Tuesday that it was rescinding mandatory underwriting provisions -- which essentially require lenders to confirm that borrowers can pay back the loan before issuing it -- framing the move as an effort to "maintain consumer access to credit and competition in the marketplace."
"A vibrant and well-functioning financial marketplace is important for consumers to access the financial products they need and ensure they are protected. Our actions today ensure that consumers have access to credit from a competitive marketplace, have the best information to make informed financial decisions, and retain key protections without hindering that access," CFPB Director Kathleen L. Kraninger said in a statement.
"The Bureau protects consumers from unfair, deceptive, or abusive practices and takes action against companies that break the law. We will continue to monitor the small dollar lending industry and enforce the law against bad actors," Kraninger said.
The payday loans industry has courted controversy for years, with many critics slamming the high interest rates and allegedly predatory practices lenders use on often-desperate customers that can lead to so-called "debt traps." The industry has also faced criticism for allegedly targeting communities of color.
Advocacy groups were quick to slam the CFPB's announcement that it was scrapping the limitations, especially amid the coronavirus-induced financial crisis.
"By eliminating the ability-to-repay protections, the CFPB is making a grave error that leaves the 12 million Americans who use payday loans every year exposed to unaffordable payments at annual interest rates that average nearly 400 percent," Alex Horowitz, the senior research officer at Pew Charitable Trusts' consumer finance project, said in a statement.
Horowitz called on financial institutions to still abide by the protections, which encouraged mainstream lenders to offer affordable installment loans options.
"Despite the CFPB's abandonment of these critical consumer safeguards, banks, credit unions, and responsible lenders should reject balloon payments and instead offer consumers installment loans on affordable terms," Horowitz said.
Linda Jun, the senior policy counsel at the nonprofit group Americans for Financial Reform, said that the CFPB's announcement amid the COVID-19 crisis could have disastrous effects.
"Amid a global pandemic and an economic contraction with little precedent, the CFPB has chosen to devote scarce resources not to protecting consumers, but to dismantling guardrails that would have given people more protection from predatory lenders," Jun said in a statement.
"It will give loan shark-like payday lenders greater leeway to exploit the current crisis by continuing to trap people in debt and hamper their financial recovery," she added.