Today's Trends in Credit Regulation

CFPB Launches Regulation of Payday Lenders
By Meghan S. Musselman

On January 19, 2012, the Consumer Financial Protection Bureau held a field hearing in Birmingham, Alabama to discuss payday loans. On the same day, the CFPB released its examination procedures for short-term, small-dollar lending. These two events appear to signify the CFPB’s entrée into payday loan regulation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act grants the CFPB express power to supervise and regulate payday lenders. Prior to the Dodd-Frank Act, payday lenders were subject to supervision only at the state level and were largely unregulated at the federal level. Although many provisions of the Dodd-Frank Act went into effect on July 21, 2011, the CFPB was not authorized to employ its new supervisory powers over payday lenders until a Director was appointed to head the CFPB. With President Obama’s recess appointment of Richard Cordray on January 4, 2012, the CFPB’s supervisory powers over payday lenders went live.

At the field hearing in Birmingham, CFPB Director Richard Cordray announced the CFPB’s intention to regulate payday lenders and to start examining payday lenders soon. Cordray defined payday loans as “short-term, high-cost loans made in exchange for a commitment to repayment from the person’s next paycheck.” Cordray made clear that the CFPB will be looking at both nonbank payday lenders, as well as banks that offer deposit advance products.

Cordray said that payday lending is an important area for the CFPB, and the fact that the field hearing on payday lending was scheduled within weeks of Cordray’s appointment solidifies payday lending’s place as a top CFPB priority. Cordray acknowledged that payday lending is often used as a source for emergency credit and recognized that there is a continuing need for such credit. In that vein, the purpose of the hearing was to gather information that will assist the CFPB as they “get a complete picture of the payday market” and “balance the needs of consumers with the risks they face.”

Cordray outlined several practices that will be in the CFPB’s crosshairs. First, the practice of rollovers, where a customer continues to renew their payday loan over an extended period of time, is concerning to the CFPB. The CFPB has received numerous accounts of customers that repeatedly roll over their payday loans, making it increasingly difficult to pay down the balance on those loans. The CFPB will take a closer look at this practice to understand how consumers are affected by it.

In contrast to this information gathering approach on certain practices in the payday industry, the CFPB intends to take immediate action to curb practices that are clearly illegal. For example, unauthorized debits from a consumer’s checking account. This often occurs when a consumer does not deal directly with a payday lender, but rather deals with a marketer that collects the consumer’s information and farms it out to lenders that will bid for the consumer’s business. The marketer will then take that information and make unauthorized debits from the consumer’s bank account. The CFPB will take immediate steps to eliminate such fraudulent and illegal practices. Similarly, the CFPB will target aggressive debt collection practices, such as posing as a federal authority, threatening borrowers with criminal prosecution, improper wage garnishment and harassment.

While Cordray laid out the CFPB’s approach to payday regulation and gathered information, the CFPB released its Examination Procedures for Short-Term, Small-Dollar Lending. Like the mortgage lending examination manuals released in the fall of 2011, the manual includes a risk-based component. The CFPB will look at risks these loans pose to consumers, including potentially unfair, deceptive, or abusive acts or practices. The manual instructs examiners to look at whether consumers understand the terms of these loans and highlights certain practices, such as use of lead generators and rollovers, for review.

It will be interesting to see whether, in light of its information gathering process, the CFPB will take any specific action aimed at payday lenders or if it will rely on its general supervision and UDAAP authority to take aim at practices it finds troubling.

Meghan S. Musselman is a partner in the Maryland office of Hudson Cook, LLP. Meghan can be reached at 410-865-5403 or by email at

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