How the Consumer Financial Protection Bureau will affect Payday Lending

By: Javi Calderon
How the Consumer Financial Protection Bureau will affect Payday Lending

For years Elizabeth Warren, a professor at Harvard Law and an expert in consumer debt, advocated for government involvement in regulating credit products. In 2008, congress asked her to oversee a project named the Troubled Asset Relief Program, created to help save big banks and minimize national and global financial repercussions from the rapidly growing financial crisis.

When subprime mortgages, rampant foreclosures in Florida and California, and a nation-wide epidemic of credit card debt threatened to topple the American economy, her ideas of a federal agency to monitor credit products began to gain traction.

In 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act to enact sweeping changes in the nation’s financial system in order to establish stability and (hopefully) prevent future nation-wide financial pitfalls. The law was designed to create transparency within the system, establish self-regulation and checks, and create systems for consumer protection against abusive practices or products.

Included in the law is the approval for the creation of Warren’s brainchild, the Consumer Financial Protection Bureau as part of the Federal Reserve. The Bureau is charged with overseeing and regulating non-bank financial institutions – credit unions, independent mortgage brokers, payday loan lenders, etc. and credit products.

The CFPB will not have the authority to write new and implement new laws or set interest rates and fees, they will however, be able to rewrite and enforce rules that govern financial products.

Payday loans, constantly in the news these days as states ratify laws to limit interest rates, operate outside of federal laws that regulate big banks. Under the CFPB, however, this may quickly change.

Though Warren has been critical of the payday loan industry in the past, she has recently acknowledged the importance of short-term credit options to many American families. Warren claims that the Bureau will not move to prohibit payday advance options, but will look to establish laws of clear disclosure and products that are safe and beneficial to the consumer.