CFPB Head: Limited Control Over Online Lending

Posted by: Jeff Brownlee

By Alan Zibel
The Wall Street Journal
August 22, 2013

The head of a federal consumer regulator conceded his agency has limited ability to tamp down on high-interest online payday lending, a growing industry that is subject to a patchwork of oversight.
Consumer Financial Protection Bureau Director Richard Cordray’s remarks come as more short-term loans are made online, sometimes by lenders who argue they aren’t subject to interest-rate caps. Lenders run by some Indian tribal governments, for instance, say their own laws apply, rather than the laws of the borrower’s home state.

The volume of online payday lending—a term for smaller, short-term loans at high interest rates—rose to $18.6 billion in 2012, up 10% from the previous year and accounting for nearly 40% of all payday-loan volume, according to investment bank Stephens Inc.

Mr. Cordray, a former attorney general of Ohio, said all lenders need to follow the laws that govern them. But he suggested his agency may not have authority over whether online lenders are violating state interest-rate caps. “State authorities enforce state law, we enforce federal law,” Mr. Cordray seaid in an interview with The Wall Street Journal.

He said his agency is nevertheless focusing on ways to protect consumers from high interest-rate loans, which he called “debt traps.”

“That’s a real concern for us, when consumers end up stuck” paying interest of up to 300% or 400%, Mr. Cordray said.

The agency has said it is studying what kind of rules could be appropriate for short-term loans, but hasn’t indicated when it will propose them.

Unlike states, Mr. Cordray’s agency isn’t permitted to regulate interest rates. Instead, the agency could cap the number of consecutive loans borrowers can take out, or force borrowers to take a break between loans.

The CFPB also has broad authority to pursue lenders over what it deems to be deceptive or abusive practices, a potentially powerful tool for the regulator.

In recent weeks, state officials have clashed with some lenders, particularly Indian tribes, over online loans. New York’s top banking regulator, Benjamin Lawsky, earlier this month ordered 35 online and tribal lenders to stop offering online payday loans in New York, saying they are illegal because they violate a state-imposed cap on interest rates charged to consumers.

This week, two tribes sued New York in response, arguing that they don’t have to comply with the state’s regulations because they enjoy sovereign status under federal law.

Representatives of several tribes have been in Washington this week, meeting with officials at the Justice Department, CFPB and Federal Deposit Insurance Corp., arguing regulators are unfairly harming legal businesses by cutting off their access to the banking and electronic payments system. Tribes say they want the government to coordinate oversight of the lending with regulatory bodies the tribes have set up.

“Tribes have always encouraged and embraced a system of co-regulation” with the federal government, said Robert Rosette, a lawyer representing several tribes. “We’ve never been against that.”

Peter Barden, a spokesman for the Online Lenders Alliance, which represents many online lenders that aren’t operated by tribal governments, said his group has established a working relationship with the regulator, meeting with CFPB officials “to discuss the importance of online lending to the consumers who depend on it to meet their short term credit needs.”

Mr. Cordray was confirmed by the Senate in July, ending a long-running battle over with Republicans over the agency’s structure. Before that, he was serving in his position through a controversial recess appointment made President Barack Obama in January 2012. In the interview he said he was glad to have that period behind him but said the change in his status won’t alter the mission of the CFPB. “Very little in our attitude changes now,” he said.

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