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1.2.6 Steps Toward Reregulation to Address the Resurgence of Abusive Lending

By the mid-1990s, the growth of abusive home equity lending prompted Congress to take a small step toward reregulation. The Home Ownership and Equity Protection Act of 1994 forbade a few particularly abusive terms and practices in a small subset of very high-cost home equity loans.61 Irresponsible mortgage lending continued to grow, however, ultimately leading to the 2007 market collapse and the failure or near-failure of most of the nation’s largest lenders, including many banks and savings associations.

In the area of non-mortgage credit, the situation facing the policymakers who designed the Uniform Small Loan Laws at the beginning of the twentieth century had resurfaced by its end. Many of the finance companies that grew out of that effort62 had themselves moved out of the genuinely small loan business into larger-balance, home-secured lending. A variety of alternate sources with effective rates that would make a loan shark jealous sprang up to fill the void left by conventional lenders.63

Payday loans, which operate with remarkable similarity to the old salary lenders,64 are now offered (legally or not) in many states. These loans, in small amounts, for terms of only a week or so at a time, may have effective interest rates of 300% to 700%.65 Pawnbrokers are with us still, but some have developed new variations, such as the “auto-pawn,” in which the borrower “pawns the title, and keeps the car.” This is essentially an auto-secured loan at pawnbrokers’ rates of over 300%.66 Rent-to-own companies provide a species of retail sales credit for household goods at effective rates which can reach triple digits.67 Extensive efforts since the 1990s to ban or regulate these products at the state level have met with positive results in many states, though not all.68 Moreover, many payday and other lenders are now providing high-cost installment loans, in addition to or as a substitute for, single-payment payday and car title loans.69 Despite the potentially positive aspect of multiple payments over time, these loans share the same troubling characteristics as single-payment payday and auto title loans: “a lack of underwriting; access to a borrower’s bank account or car as security; structures that prevent borrowers from making progress repaying; and excessive rates and fees that increase costs further when loans are flipped.”70 Moreover, high-rate installment loans can be profitable for the lenders even when a high percentage of borrowers default, thus discouraging the application of a responsible ability-to-repay standard.71

Abuses in credit card lending also grew. In 2009, Congress enacted the Credit Card Accountability Responsibility and Disclosure Act, providing some meaningful regulation of credit cards.72

In 2010, Congress dramatically restructured the credit marketplace by enacting the Dodd-Frank Wall Street Reform and Consumer Protection Act (hereinafter the Dodd-Frank Act).73 The Dodd-Frank Act represents the culmination of a series of hearings that documented the dangers, instability, and need for regulation in the credit marketplace.74 Among the major features of the Dodd-Frank Act are:

  • ● Significant narrowing of the authority of federal banking regulators to preempt state law, creating substantially more room for states to regulate consumer credit.75
  • ● Abolition of the Office of Thrift Supervision and consolidation of oversight of both national banks and federal savings and loan associations in the Office of the Comptroller of the Currency.76
  • ● Addition to the Truth in Lending Act of a host of substantive restrictions on mortgage loan and servicing abuses.77
  • ● Expansion of the remedies under the Truth in Lending Act.78
  • ● Expansion of the enforcement authority of state attorneys general and banking regulators.79
  • ● Creation of the Consumer Financial Protection Bureau (CFPB), with authority to write rules prohibiting unfair, deceptive, and abusive practices,80 and to supervise and examine major non-bank financial services providers.81

The CFPB also has authority to ban mandatory arbitration clauses after conducting a study82 and the authority, transferred from a variety of other agencies, to write rules under a number of key federal statutes such as the Truth in Lending Act.83 The CFPB does not, however, have authority to impose a usury cap.84

Public opinion, expressed through ballot initiatives and in surveys, appears to overwhelmingly favor the imposition of usury caps.85 One professor calls for a federal usury cap of 36% on consumer credit, such as payday and auto title lending laws, applicable to all, not just the military.86 Another professor takes a different approach and suggests the application of a human rights framework to complement the consumer protection approach to credit regulation.87 She focuses on the recognized human right to an adequate standard of living and suggests that the bottom line standard related to consumer credit ought to be: “contracts that substantially interfere with the debtor’s ability to meet her basic needs should be unenforceable.”88

Footnotes

  • 61 {60} National Consumer Law Center, Truth in Lending § 9.6 (9th ed. 2015), updated at www.nclc.org/library.

  • 62 {61} See § 1.2.3, supra.

  • 63 {62} See, e.g., Jessica Silver-Greenberg, Payday Lenders Go Hunting: Operations Encroach on Banks During Loan Crunch; “Here, I Feel Respected,” Wall St. J., Dec. 24, 2010 (describing how payday lenders have increased lending as banks have decreased lending).

  • 64 {63} See § 1.2.3, supra.

  • 65 {64} See Creola Johnson, Payday Loans: Shrewd Business or Predatory Lending?, 87 Minn. L. Rev. 1 (Nov. 2002) (analyzing survey data that vividly portrays the payday lending industry’s abuses); Center for Responsible Lending, Triple-Digit Danger: Bank Payday Lending Persists (2013); Eamon Javers, How Some Payday Lenders Charge Over 700% on Loans, CNBC (Sept. 17, 2012); Ch. 9, infra (discussing payday lending generally).

  • 66 {65} Jean Ann Fox et al., Consumer Fed’n of Am., Driven to Disaster: Car-Title Lending and Its Impact on Consumers 2 (2013); Ch. 12, infra.

  • 67 {66} See Christine Bradley et al., Alternative Financial Services: A Primer, 3 FDIC Quarterly (No. 1) 45 (2009); Creola Johnson, Welfare Reform and Asset Accumulation: First We Need a Bed and a Car, 2000 Wis. L. Rev. 1221 (2000) (describing the reasons welfare recipients are forced into RTO transactions to acquire basic necessities); Ch. 13, infra.

  • 68 See §§ 9.3 (payday lending state laws), 12.5 (auto title lending state laws), infra. See also Calif. Reinvestment Coalition, New Economy Project, Reinvestment Partners & Woodstock Inst., The Case for Banning Payday Lending: Snapshots from Four Key States (2013), available at www.woodstockinst.org; William M. Woodyard & Chad G. Marzen, Is Greed Good? A Catholic Perspective on Modern Usury, 27 BYU J. Pub. L. 185, 207–217 (2012) (describing Catholic legal thought on payday and auto title loans and efforts of the Church in support a 36% rate cap).

  • 69 Center for Responsible Lending, Payday and Car Title Lenders’ Migration to Unsafe Installment Loans 7 (Oct. 1, 2015), available at www.responsiblelending.org (providing a chart of the twenty states where payday and auto title lenders offer installment loans and/or lines of credit).

  • 70 Id. at 1. See also Consumer Fin. Prot. Bureau, Supplemental Findings on Payday, Payday Installment, and Vehicle Title Loans, and Deposit Advance Products 8–34 (June 2016), available at www.consumerfinance.gov (data shows both a high default rate and a high refinance rate for payday installment loans); Center for Responsible Lending, Predatory Payday and Larger Installment Loans Overshadow Emerging Market for Smaller, Less Expensive Installment Loans in California (Dec. 2015), available at www.responsiblelending.org. See generally Ch. 10, infra (installment loans).

  • 71 Lauren Saunders, et al., National Consumer Law Center, Misaligned Incentives: Why High-Rate Installment Lenders Want Borrowers Who Will Default (July 2016), available at www.nclc.org.

  • 72 {67} Pub. L. No. 111-24, 123 Stat. 1734 (May 22, 2009). See § 8.2, infra; National Consumer Law Center, Truth in Lending Ch. 7 (9th ed. 2015), updated at www.nclc.org/library (full discussion CARD Act).

  • 73 {68} Pub. L. No. 111-203, 124 Stat. 1376 (July 21, 2010) (hereinafter cited as Dodd-Frank).

  • 74 {69} See, e.g., S. 566, 111th Cong. (2009) (proposing a national financial products safety commission); Modernizing Bank Supervision and Regulations, Parts I & II: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 111th Cong. (Mar. 2009); Consumer Protections in Financial Services: Past Problems, Future Solutions: Hearing Before the S. Comm. on Banking, Housing, and Urban Affairs, 111th Cong. (Mar. 2009); Federal and State Enforcement of Financial Consumer and Investor Protection Laws: Hearing Before the H. Comm. on Financial Serv., 111th Cong. (Mar. 2009); Staff of the Joint Economic Comm., State by State Figures: Foreclosure and Housing Wealth Losses, 110th Cong., 2d Sess. (Apr. 2008), available at http://jec.senate.gov; Staff of the Joint Economic Comm., State by State Foreclosure Analysis, 110th Cong., 2d Sess. (Mar. 2008), available at http://jec.senate.gov; Staff of the Joint Economic Comm., The Subprime Lending Crisis: The Economic Impact on Wealth, Property Values and Tax Revenues, and How We Got Here, 110th Cong., 1st Sess. (2007), available at http://jec.senate.gov; Staff of the Joint Economic Comm., Sheltering Neighborhoods from the Subprime Foreclosure Storm, 110th Cong., 1st Sess. (2007), available at http://jec.senate.gov; Subprime Mortgage Market Turmoil: Examining the Role of Securitization: Hearings Before the Senate Comm. on Banking, Housing, and Urban Development, 110th Cong., 1st Sess. (2007), available at http://banking.senate.gov; Preserving the American Dream: Predatory Lending Practices and Home Foreclosures: Hearings Before the Senate Comm. on Banking, Housing, and Urban Development, 110th Cong., 1st Sess. (2007), available at http://banking.senate.gov; Mortgage Market Turmoil: Causes and Consequences: Hearings Before the Senate Comm. on Banking, Housing, and Urban Development, 110th Cong., 1st Sess. (2007), available at http://banking.senate.gov; Possible Responses to Rising Mortgage Foreclosures: Hearings Before the House Comm. on Financial Services, 110th Cong., 1st Sess. (2007), available at www.house.gov; Subprime and Predatory Mortgage Lending: New Regulatory Guidance, Current Market Conditions and Effects on Regulated Financial Institutions: Hearings Before the House Comm. on Financial Services, 110th Cong., 1st Sess. (2007), available at www.house.gov; Foreclosure, Predatory Mortgage and Payday Lending in America’s Cities Hearings Before the Domestic Policy Subcomm. of the House Comm. on Oversight and Government Reform, 110th Cong., 1st Sess. (2007), available at http://oversight.house.gov. Cf. S. 500, 111th Cong. (2009) (proposing federal usury limit for all consumer credit transactions). See generally www.llsdc.org/dodd-frank-legislative-history (online source of Dodd-Frank legislative history maintained by Law Librarians’ Soc. of Washington, D.C.).

  • 75 {70} See § 3.2, infra; Arthur E. Wilmarth, Jr., The Dodd-Frank Act’s Expansion of State Authority to Protect Consumers of Financial Services, 36 J. Corp. L. 893 (Summer 2011).

  • 76 {71} Dodd-Frank tit. III, §§ 311–313.

  • 77 {72} National Consumer Law Center, Truth in Lending Ch. 9 (9th ed. 2015), updated at www.nclc.org/library (full discussion of these provisions).

  • 78 {73} See National Consumer Law Center, Truth in Lending Chs. 9, 11 (9th ed. 2015), updated at www.nclc.org/library (full discussion of these provisions) (full discussion of these provisions).

  • 79 {74} See Lauren Saunders, National Consumer Law Center, The Role of the States under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dec. 2010), available at www.nclc.org.

  • 80 {75} See Dee Pridgen, Sea Changes in Consumer Financial Protection: Stronger Agency and Stronger Laws, 13 Wyo. L. Rev. 405, 412–414 (2013) (highlighting new possibilities for consumer regulation under the “abusive” practices standard of the CFPB); § 2.2.6.2, infra.

  • 81 {76} 12 U.S.C. § 5514.

  • 82 {77} Dodd-Frank tit. X, § 1028, 12 U.S.C. § 5518.

  • 83 {78} Dodd-Frank tit. X, §§ 1002(12), 1022, 12 U.S.C. §§ 5481(12), 5512.

  • 84 {79} Dodd-Frank tit. X, § 1027(o), 12 U.S.C. § 5517(o).

  • 85 {80} See, e.g., Nathalie Martin, Public Opinion and the Limits of State Law: The Case for a Federal Usury Cap, 34 N. Ill. U. L. Rev. 259, 269–272 (2014) (noting successful ballot initiatives in Arizona, Montana, and Ohio; summarizing opinion surveys in Colorado, Iowa, Rhode Island, and Texas and a national survey conducted by the Center for Responsible Lending); Nathalie Martin & Timothy Goldstein, Interest Rate Caps, State Legislation, and Public Opinion: Does the Law Reflect the Public’s Desires?, 89 Chi.-Kent L. Rev. 115, 123–130 (2014) (results from a survey of 199 individuals in New Mexico revealed that 86% of the respondents believe that the government should set limits on interest rates; a high degree of consensus persisted even among the “conservative” respondents (82% agree) and very conservative respondents (57% agree) and across party lines (94% of Democrats and 73% of Republicans agree)).

  • 86 {81} Nathalie Martin, Public Opinion and the Limits of State Law: The Case for a Federal Usury Cap, 34 N. Ill. U. L. Rev. 259, 274–281, 297 (2014) (detailing why state law attempts to curtail high-cost consumer loans have failed; arguing that a federal law is a better solution, in part, because: “[T]he entire country is a common market, such that any state’s regulation of interest rates inherently reaches across borders. Thus, there is a need for uniformity on interest rates across those borders, which only Congress can provide.”). See also Creola Johnson, Congress Protected the Troops: Can the New CFPB Protect Civilians from Payday Lending?, 69 Wash. & Lee L. Rev. 649, 679 (2012) (“Without these numerous benefits awarded to military families, average civilian families are even more vulnerable to economic hardship and, therefore, likely to rely on payday loans.”). See generally § 2.2.5, infra (discussion of Military Lending Act).

  • 87 Chrystin Ondersma, A Human Rights Approach to Consumer Credit, 90 Tulane L. Rev. 373 (2015–2016).

  • 88 Id. at 418.