The only newsletter that scans and analyzes the full breadth of regulatory developments every day. Written and curated by Rob Garver for SourceMedia.

10.6.17 - If there was a single person involved in the payday lending industry who remained unconvinced that federal regulators were out to get them, Thursday’s combined actions by the Consumer Finance Protection Bureau and the Office of the Comptroller of the Currency ought to have put their doubts on the matter to rest.

In the first half of a double whammy, the CFPB finalized a rule placing much stricter requirements on the underwriting process that payday lenders must undertake before offering short-term credit. The agency’s rationale for the move was that it had “determined that risky lender practices are pushing borrowers into debt traps or forcing them to cede control of their financial decisions,” American Banker reports.

On the same day, the Office of the Comptroller of the Currency announced that it was rescinding a rule that blocked national banks from offering “deposit advance” products -- short-term extensions of credit that are meant to serve the same market as payday loans.

Among the requirements the CFPB rule places on lenders is that they establish the borrower’s ability to pay. This includes making an effort to somehow verify that the client can both make loan payments and afford basic living expenses, particularly in the month following the largest payment associated with the loan.

The rule also aims to shut off one of the industry’s most reliable streams of income: fees and interest paid by repeat borrowers who effectively roll over their credit multiple times, incurring charges each time they do so. The rule would limit the rapid-fire extension of multiple loans to the same borrower to three.

In a statement, the agency’s director, Richard Cordray, said, “The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country. Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”

Unsurprisingly, the industry pushed back against the CFPB. “The CFPB whiffed at an opportunity to provide assistance to the millions of Americans experiencing financial hardship,” Consumer Bankers Association Chief Executive Officer Richard Hunt said in a statement.

The second blow to the industry came when a different regulator, the Office of the Comptroller of the Currency, announced that it was rescinding a rule it had previously approved to limit national banks’ ability to make “deposit advance” loans, small-dollar loans similar to those offered by payday lenders. The decision to undo that rulemaking appears to offer banks the chance to slip in and take advantage of a market that is now more difficult for payday lenders to serve.

The OCC’s announcement gave several reasons for its decision. Among them was concern that the existing barriers to deposit advance products conflicts with other existing rules. However, the payday loan industry can hardly have missed the agency’s other rationalization: it believes customers need to have a choice that allows them to avoid “less-regulated lenders.”

The agency wrote, “The OCC is concerned that banks are able to serve consumers’ needs for short-term, small-dollar credit.”

The CFPB, during its relatively short life, has become the bête noire of many segments of the financial services industry, with the payday lending industry in particular convinced that it was being singled out for persecution by the consumer bureau, even as other regulators regarded it with suspicion.

Thursday’s actions seem to prove the old maxim: Just because you’re paranoid, it doesn’t mean they aren’t after you.

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Today’s Key Reads

Treasury rolls back some tax regulations
Accounting Today - The Treasury Department released a report Wednesday outlining a set of actions it plans to reduce eight tax regulations it identified earlier this year as burdensome. The Treasury is also planning to identify more regulations for modification or repeal. Its review has already found over 200 regulations that it believes should be repealed, starting in the fourth quarter of this year.

Study finds financial rewards can deter whistleblowers
Accounting Today - Monetary awards for fraud whistleblowers may seem like a no-brainer, but a new study has found that offering cash for fraud detection may actually negatively effect individual's motivations.

Senate confirms Quarles as first Fed vice chair of banking supervision
American Banker - The Senate on Thursday confirmed Randal Quarles 65-32 to join the Federal Reserve Board as a governor and later by voice vote as the first vice chairman of banking supervision. That position was created by the Dodd-Frank Act of 2010, but was never filled by the Obama administration, which relied on former Fed Gov. Daniel Tarullo to fill the role on a de facto basis.

Will regtech kill bank jobs?
American Banker - Technology and regulation are intersecting in ways that create uncertainty in a number of areas, but for those who work in compliance, the big question is whether advanced technologies like artificial intelligence and blockchain will ultimately replace people. It’s a fear that some banks have already faced head-on. When BBVA Compass recently began using robotic process automation to carry out specific pieces of compliance, such as retrieving statements, employees were worried.

Navient hit with Pa. lawsuit, adding to servicer’s troubles
American Banker - The state of Pennsylvania sued the nation’s largest student loan company on Thursday, alleging that Navient Corp. perpetrated a wide range of consumer abuses both before and after the financial crisis. The complaint was filed in U.S. District Court by the state’s Democratic attorney general, Josh Shapiro. It demonstrates that despite the recent appointment of more industry-friendly regulators in Washington, D.C., financial service companies still face significant legal threats from state capitals.

As CFPB closes door on payday, OCC opens one for deposit advance
Credit Union Journal - The world of short-term lending was shaken up Thursday as one regulator issued a rule cracking down on payday loans while another made it easier for banks to offer an alternative product.

Dodd-Frank thresholds have ‘perverse effect,’ says acting comptroller
American Banker - Acting Comptroller of the Currency Keith Noreika on Thursday called for steps to ease the asset thresholds that determine whether banks are subject to certain provisions of the Dodd-Frank Act. In prepared remarks to a meeting of bankers in Dallas, Noreika said “arbitrary thresholds often have the perverse effect of acting as competitive barriers.”

Tax Fraud Blotter: Fatherly fraud
Tax Pro Today - Oh, baby; all in the family; 63 calls to Western Union; and other highlights of recent tax cases.

Extra Credit

Un-erasing Puerto Rico’s Debt
New York Times - As the White House walked back President Trump’s suggestion that the federal government would somehow “sipe out” Puerto Rico’s crippling debt burden, officials on the island warned that lack of funds could cause a government shutdown by the end of the month.

As ACA enrollment nears, administration keeps cutting federal support of the law
Washington Post - The Trump administration has taken a number of steps that suggest the White House is actively trying to undermine the Affordable Care Act, according to a report from the Post.

Senate GOP Hits Resistance on Estate-Tax Repeal—From Republicans
Wall Street Journal - In years past, the need to repeal the estate tax -- or the “death tax,” as they prefer to call it -- has been an article of faith with most republicans. But the commitment may be fading with the prospect of broader tax code reform.

Renzi warns ECB risks more crisis with change to bad loan rules
Financial Times - The former Italian Prime Minister, still a major force in the country’s ruling party, offered an unusually strong warning to the European Central Bank, which is considering a rule that would riase requirements for banks’ loan loss provisions. “Some European officials in the banking sector ignore that their duty is to AVOID credit crises, not CREATE them,” he wrote on Twitter.

Rob Garver

Rob Garver has been covering the intersection of public policy and the private sector for more than 20 years.