Congress Protected the Troops: Can the New CFPB Protect Civilians from Payday Lending?

In 2007, Congress enacted a law, commonly referred to as the Military Lending Act (MLA), which placed a 36% interest rate cap on several consumer loans, including payday loans, and prohibits lenders from engaging in several practices considered predatory. However, the MLA grants these protections only to active-duty military members and their dependent family members. In the wake of the mortgage foreclosure crisis, Congress passed and President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd–Frank Act), which creates a new federal agency, the Bureau of Consumer Financial Protection (CFPB), to focus on protecting consumers in the credit market place. In this Article, I assert that the newly-created CFPB should use its authority to afford to ordinary Americans protections similar to those now enjoyed exclusively by military families. To support my assertion, I describe how payday loans entrap civilian Americans in a cycle of indebtedness just like they once ensnared military families and yet both groups are equally lacking in financial sophistication. I further describe how regular payday lenders and now major banks, such as Wells Fargo, are engaged in reckless lending because when issuing a payday loan, they fail to do any assessment of a borrower’s ability to repay, charge triple-digit-interest rates, issue loans frequently in excess of the borrower’s next paycheck, and require loans to be repaid in a single balloon payment usually in fourteen days or less.The CFPB needs to act to protect civilians because, despite attempts by several states to curb payday lending, payday lenders exploit loopholes in state laws or use scams to skirt consumer protection laws. The CFPB also needs to protect civilians because they are more vulnerable to ensnarement by payday loans than the active-duty military members. Military families enjoy a strong social safety net, which is comprised of numerous benefits, including complete health care coverage, educational assistance and subsidized housing. In contrast, average low-to-moderate-income civilian families face financial difficulties due to high unemployment rates and ever-shrinking compensation and benefits packages. If military families, who enjoy strong social safety nets, need protection from payday loans, then unquestionably civilian Americans, who are largely left to fend for themselves, deserve protection from payday loans.Under Title X of the Dodd–Frank Act, the CFPB has the authority to issue rules as well as guidelines to prevent a covered financial institution from committing an unlawful practice in connection with any consumer financial product or service. Because the rulemaking process could take as long as ten years, I propose that the CFPB issue immediately guidelines and a policy statement to get lenders to voluntarily cease predatory lending practices. The guidelines would give notice to all lenders about which common payday lending practices the CFPB considers unfair, abusive and deceptive and, therefore, unlawful. The CFPB’s policy statement would identify responsible lending practices, such as applying reasonable criteria to assess a consumer’s ability to pay and avoiding any practice that extends the loan’s due date for the primary purpose of generating fees for the lender. While the guidelines would warn lenders that they may be subject to enforcement actions for committing unlawful practices, the policy statement would provide a safe harbor, exempting from enforcement actions lenders who follow practices that comport with responsible lending standards. In addition to using the guidelines and policy statement to decrease the supply of payday loans, the CFPB should use its educational mandate to increase the demand for safe affordable loans. To accomplish this mandate, the CFPB needs to employ a multi-faceted strategy that harnesses the power of social media and uses a national public service announcement campaign to make it easy for consumers to access safe affordable loans from lenders with a demonstrated commitment to responsible lending practices.