A federal rule that would have provided an extra level of consumer protection against payday lending practices has been proposed to be rescinded on the basis that it would reduce access to short-term loans for consumers.

Idaho cities in the past have attempted to protect citizens from payday loans that often trap consumers with drastically high interest rates. Idahoans paid almost $31 million in overdraft bank fees for payday loans and more than $65 million in fees for title loans in 2017, said Ellen Harnick, head of the Center for Responsible Lending's western office in Oakland.

“That’s $96 million being sucked out of the wallets of families in Idaho,” she said. “It’s coming out of the monthly budget of people who are reaching out for these loans, almost invariably, the people who can’t afford it.”

The rule would have forced payday and title loan lenders to take an extra step in determining the probability that a customer could repay the loan in full. Industry titans say the repeal of the rule by no way means their businesses are going to go unregulated, and it would be "nonsensical" to lend to individuals who could not pay them back.

"We are regulated as stringently as any bank out there," Moneytree CEO Dennis Bassford told the Idaho Press.

Industry associations say setting strict rules for licensed payday lenders will only limit consumers' options for short-term loans.

PAYDAY LENDING IN IDAHO

Some states have implemented rate caps and other loan restrictions to reduce exploitative loan practices.  

Idaho has some of the highest payday and title loan interest rates in the country, with an average interest rate of 652 percent, according to Center for Responsible Lending 2019 data.

This potential debt trap for consumers hasn't gone unnoticed by Idaho lawmakers. In 2014, the Legislature passed a bill amending Idaho’s Payday Loan Act to include new protections for borrowers.

Caldwell City Council set out to reduce the number of payday lenders within the city two years ago by approving an ordinance to exclude payday and title lenders from commercial property without council approval. Pre-existing lenders went untouched, but the change limited the number of lending businesses lining Caldwell streets.

Caldwell Mayor Garret Nancolas said the measure was put in place to help protect and educate Caldwell citizens on the potential negative effects of taking out a payday or title loan.

“It seemed like for a while there was another payday loan place popping up everywhere,” he said. “We thought it was in the best interest of the citizens.”

The number of payday lenders in Idaho has gone down slightly. Registered payday lending businesses have dropped from 174 in 2016 to 154 in 2018. Consumer complaints rose from five in 2016 to 11 in 2018, according to the Idaho Department of Finance.

Often, complaints regard misunderstanding of the terms of a loan, said Anthony Polidori, consumer finance bureau chief for the department.

The finance department has documents online outlining borrowers' rights, including lists of alternative options that “may be wise to consider,” such as loans from banks, employers, local government programs or family members.

Bassford, the Moneytree CEO, was born and raised in Idaho and attended Boise State University. Though their company is based in Seattle, the Bassford family continues to donate to Idaho state government candidates — almost $125,000 since 2002, according to campaign finance reports. 

"Our business can be affected by government," Bassford said. "We have for years been active in expressing our freedom of speech in support of people who have our interests in mind."

Moneytree has 13 locations in Idaho, according to its website including locations in Boise, Garden City, Meridian, Nampa and Caldwell.

During the 2018 election, Dennis, Robin, Sara and David Bassford contributed separately, for a combined $20,000 to newly elected Gov. Brad Little's campaign. Over a decade of campaigning from 2004 to 2014, former Gov. Butch Otter received nearly $63,000 in campaign donations from the Bassford family.

Gov. Brad Little could not schedule an interview to address the donations and payday lending in Idaho before publication.

NATIONAL CHANGES

In 2016, the U.S. Consumer Financial Protection Bureau drafted a rule requiring payday lenders to “reasonably determine that the consumer has the ability to repay the loan” before lending, preventing them from capitalizing on poor consumers.

The policy was set to begin Jan. 16, 2018, with a total compliance date in August 2019 — but the day it became effective, the bureau announced reconsideration.

The bureau, established as the national financial watchdog, underwent a battle for control last year after former President Barack Obama’s appointed director stepped down. 

Amid protest, President Trump named former Republican congressional member Mick Mulvaney — now the acting White House chief of staff and head of the federal Office of Management and Budget — acting director of the bureau.

He was succeeded in December 2018 by Kathleen Kraninger, her nomination passing by just one Senate vote. Kraninger, formerly with the Office of Management and Budget, released the proposal last month to roll back some of the payday lending restrictions.

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The bureau’s 2016 concerns of “risky lender practices” that set consumers up “to fail with loan payments that they are unable to repay” were dismissed on the basis that the changes would “reduce access to credit.

“People say these loans are necessary, and people rely on them for ‘access to credit,’” Harnick, with the Center of Responsible Lending, said told the Idaho Press. “They say this is a useful function, when in fact we know this high-cost debt, when used to fund day-in-day-out normal living expenses, is unsustainable.”

Payday lenders gaining political influence, she said, is the “backdrop on which these changes are being made.”

PROPONENTS OF THE REPEAL

Bassford with Moneytree said one of the largest misconceptions he's seen about the rule repeal is that the change leaves the industry unregulated.

"I have been regulated directly by the Consumer Financial Protection Bureau since 2012 and have had two or three examinations by them," he said. "Just because this rule is being changed doesn’t change the fact that we are an extremely highly regulated industry."

The rule itself — which would have forced lenders to review the probability a borrower could repay the loan — would have been hard to comply with, Bassford said.

"We are like anybody extending credit. We are consistently challenged by trying to find that right balance in terms of who to loan to," he said. "Why would I loan money to people who can’t pay it back? Why would I need these requirements from the federal government?"

The Community Financial Services Association of America, which represents payday lenders, applauded the rescinding of the rule as a "good first step" addressing "critical flaws" in government regulation of the payday industry. 

A statement from its CEO said the rule itself was based on a "partisan political agenda," and the Consumer Financial Protection Bureau ignored input that the rule would limit access to credit.

It's not licensed payday lenders the federal government needs to target; it's the illegitimate lenders, Dennis Shaul, CEO of the association, said in a statement.

Bassford, who sits on the board of directors for the association, said online lenders pose a larger threat to consumers because they could be operating offshore — not following state and federal laws.

"So much of the lending right now is really done online, by people who don’t have an office in Idaho, and sometimes you’re not sure even where they operate," he said. "They aren’t going to abide by any of these state laws."

RATE CAPS, DEBT TRAPS

Harnick said payday lenders benefit from high rates and "trapping" individuals who can't afford to both pay back the loan and cover basic expenses, pushing them to take out another loan.

The cycle is coined the "debt trap" for consumers.

In some cases, payday lenders have electronic access to borrowers' bank accounts. When the borrower's payday comes, lenders can reach directly into accounts and pull money owed, which can lead to overdraft fees. 

No federal law imposes a maximum interest rate cap on payday lenders — however states have the ability to do so. Sixteen states have voted on and implemented a rate cap on short-term lending businesses to curb predatory rates. Idaho is not one of them.

The proposed and withdrawn federal rule wouldn’t have imposed a rate cap but would have done the next best thing for consumer protection, Harnick said.

“The rule would disrupt the process enough that it would put some breaks on the debt trap,” she said. “If it took effect, it would have a real beneficial impact, particularly in places like Idaho where the rates are so high.”

DEMAND FOR CREDIT

Trent Wright, president and CEO of the Idaho Bankers Association, said the demand for small-credit loans are high, but traditional banks have limited options to support clients with those needs.

Over 40 percent of adults could not cover an emergency expense of $400 without using a credit card, selling a possession or borrowing money, according to the 2017 governmental report on the Economic Well-Being of U.S. Households,

"This demand cannot be regulated away by government action that restricts the credit supply to meet the demand," Wright said told the Idaho Press in an email. "If banks and other licensed providers are not able to offer short-term credit, consumers will be forced to meet their needs through 'informal' sources of funds."

As it stands, banks have few channels for customers seeking short-term loans. Some federal credit unions offer payday alternative loans with lower interest rates and longer periods of time to repay, but not all.

"Many Idahoans want and rely upon small-dollar credit," Wright said, "and banks are eager to expand their offerings of trusted and responsible services to these borrowers."

Riley Bunch covers the intersection of state and federal politics in addition to education and social issues for the Idaho Press. Reach her at rbunch@idahopress.com or follow @rbunchIPT on Twitter.

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