The new agency looked like a start-up. Cordray, a Democrat, struggled to recruit widely, bringing in financial industry veterans and former prosecutors, but Warren’s creation inevitably attracted Warren’s sidekicks and veterans from consumer advocacy groups. , many of which landed in the app division. As the human and financial costs of the subprime mortgage crash escalated, the new office was inundated with tips from whistleblowers and complaints from consumers. Cordray and his management team had originally planned to focus on the biggest players in consumer credit, such as mortgage lenders and credit card companies; payday lenders were a relatively small industry compared to Wall Street. But it was growing rapidly: the crisis had been good for business, drawing more middle-class families into the payday loan market. And unlike banks, payday lenders weren’t federally regulated. “It affected a lot of marginalized people who could least afford to get in trouble,” Cordray told me recently.
In 2012, the CFPB began conducting supervisory reviews of payday lenders, a process that required them to open their offices and books, and occasionally provided evidence of predatory lending to the office’s enforcement team. A company called Ace Cash Express, investigators found, harassed late borrowers using bogus legal threats. The survey provided a powerful illustration of the debt trap: Ace Cash’s training manual, which asked employees to pressure borrowers to pay off delinquent loans by taking out new ones, illustrated its customer service doctrine with a graphic resembling a a “short-term” loan feeding the next in an endless loop of indebtedness.
Other surveys have highlighted the contempt some lenders have for their new regulator. When the office informed Cash America, a large Texas-based company, that it planned to conduct a review, employees at shredded internal records and deleted records of phone calls with customers. Company managers have asked employees to mislead office examiners about its sales practices and stripped its call center of posters urging employees to collect their debts. (The bureau later found out that Cash America illegally overcharged hundreds of military personnel and their families and ordered the company to pay a $ 5 million fine.)
The reviews also provided an insider’s perspective on the historically island industry, data that in turn guided law enforcement attorneys and regulatory draftsmen in the office. An office study of 15 million loans found that customers who kept renewing their loans – taking 10 or more per year – were the cream of the day payday lending industry, generating three-quarters of all loan fees. Advance America and other lenders disputed the findings, arguing that the bureau underestimated one-time borrowers. But Cordray and his team saw evidence of a major regulatory failure: State-level reform efforts had largely failed to tackle the industry’s most abusive features, like debt traps. And lenders were devising increasingly sophisticated tools to escape state regulation altogether: some have incorporated themselves into Indian reservations or offshore financial havens, selling loans online and claiming to be completely safe. state laws.
One faction within the office has advocated a strategy of hyperaggressive lawsuits to bring the industry in line. Instead, Cordray opted for a two-pronged strategy, according to current and former employees of the office. Lawyers for the app would start suing the worst thugs in the industry, especially the growing online lenders. But at the same time, the office would develop a strict set of rules that would apply to everyone.
In 2015, the agency presented its basic proposal, a proposal that would eliminate debt traps: a repayment capacity rule. Under such a rule, payday lenders should check whether borrowers can afford to repay a loan before granting it in the first place – a short-term loan should in fact be short-term, not just for use. bait for a debt trap. The rule would have teeth: if companies lent money to people who could not afford to pay it back, they would face legal action and significant fines. “We wanted to push for industry reform,” Cordray says. “If they couldn’t reform their products, some of them would withdraw from the industry altogether. “
The backlash against the proposal was severe. Dennis Shaul, who heads the Community Financial Services Association of America, a business group founded by Advance America and other payday lenders, told me his group allegedly supported certain limits on repeat borrowing. But the repayment capacity rule, according to its members, was designed to shrink their industry. “We felt their solution was arbitrary,” Shaul says. The association worked with Jones Day, a powerful Washington law firm, to mount a legal challenge on all fronts. Advance America has accused consumer groups like the Center for Responsible Lending, including alumni scattered around the office and who had consulted him closely on the proposed rules, to “infiltrate” the CFPB (The revolving door, of course, went both ways: Shaul was recruited by industry after working for Barney Frank, the Democrat from Massachusetts who authored Dodd- Frank, and dozens of former office officials went on to work for the financial industry.) The industry gathered studies, including one conducted by the office’s former deputy research director, concluding that the office’s proposal would cut revenues so drastically that it would bankrupt storefront businesses.