The new agency had the feel of a start-up. Cordray, a Democrat, made an effort to recruit broadly, bringing in financial-industry veterans and former prosecutors, but Warren’s creation inevitably attracted Warren acolytes and veterans of consumer-advocacy groups, many of whom landed in the enforcement division. As the human and financial costs of the subprime-mortgage crash mounted, the new bureau was inundated with whistle-blower tips and consumer complaints. Cordray and his leadership team initially planned to focus on the biggest consumer-finance players, like mortgage lenders and credit-card companies; payday lenders were a relatively small industry compared with Wall Street. But it was growing quickly: The crisis had been good for business, pulling more middle-class families into the payday-loan market. And unlike banks, payday lenders were unregulated by the federal government. “It was affecting a lot of people at the margins who could least afford to run into trouble,” Cordray told me recently.
In 2012, the C.F.P.B. began conducting supervisory exams of payday lenders, a process that required them to open up their offices and books, and sometimes yielded evidence of predatory lending for the bureau’s enforcement team to take up. A company called Ace Cash Express, investigators found, harassed overdue borrowers by using phony legal threats. The investigation yielded a potent illustration of the debt trap: Ace Cash’s training manual, which instructed employees to pressure borrowers into paying off overdue loans by taking out new ones, illustrated its customer-service doctrine with a graphic resembling a recycling symbol, with one “short-term” loan fueling the next in an endless loop of debt.
Other investigations underscored the contempt that some lenders had for their new regulator. When the bureau informed Cash America, a major firm based in Texas, that it planned to conduct an examination, employees there shredded internal records and deleted recordings of phone calls with customers. Managers at the firm instructed employees to mislead the bureau’s examiners about its sales practices and stripped its call center of posters exhorting the employees to collect on debts. (The bureau later found that Cash America had illegally overcharged hundreds of service members and their families and ordered the company to pay a $5 million fine.)
The exams also provided an insider’s view of the historically insular industry, data that in turn guided the bureau’s enforcement lawyers and regulation writers. A bureau study of 15 million loans found that customers who kept rolling their loans over — taking out 10 or more a year — were the cream of the payday-loan industry, generating three-quarters of all loan fees. Advance America and other lenders disputed these findings, arguing that the bureau had undercounted one-time borrowers. But Cordray and his team saw evidence of a major regulatory failure: State-level reform efforts had largely failed to rein in the industry’s most abusive features, like debt traps. And lenders were devising ever-more-sophisticated tools to evade state regulation altogether: Some incorporated on Indian reservations or in offshore financial havens, selling loans online and claiming to be immune from state laws entirely.
A faction in the bureau advocated a strategy of hyperaggressive enforcement lawsuits to bring the industry to heel. Instead, Cordray settled on a two-pronged strategy, according to current and former bureau employees. Enforcement lawyers would begin prosecuting the industry’s worst scofflaws, especially the growing online lenders. But at the same time, the bureau would develop a package of tough rules that would apply to everyone.
In 2015, the agency outlined its core proposal, one that would eliminate debt traps: an ability-to-repay rule. Under such a rule, payday lenders would have to check whether borrowers could afford to pay back a loan before making it in the first place — a short-term loan would have to actually be short-term, not just bait for a debt trap. The rule would have real teeth: If companies lent money to people who couldn’t afford to pay it back, they could face prosecution and sizable fines. “We wanted to prompt reform in the industry,” Cordray says. “If they couldn’t reform their products, some of them would get out of the industry altogether.”
The backlash against the proposal was severe. Dennis Shaul, who leads the Community Financial Services Association of America, an industry trade group founded by Advance America and other payday lenders, told me that his group would have supported some limits on repeat borrowing. But the ability-to-repay rule, his members felt, was designed to shrink their industry. “We felt their solution was arbitrary,” Shaul says. The association worked with Jones Day, a powerhouse Washington law firm, to mount an all-fronts legal challenge. Advance America accused consumer-advocacy groups like the Center for Responsible Lending, whose alumni dotted the bureau and who had consulted closely with it on the proposed rules, of “infiltrating” the C.F.P.B. (The revolving door, of course, spun both ways: Shaul was recruited by the industry after working for Barney Frank, the Massachusetts Democrat who was an author of Dodd-Frank, and dozens of former bureau officials have gone on to work for the financial industry.) The industry mustered studies, including one by the bureau’s former assistant research director, finding that the bureau’s proposal would cut revenue so drastically as to put storefront companies out of business.