The Consumer Financial Protection Bureau on June 2 proposed a rule aimed at ending payday debt traps by requiring lenders to ensure borrowers can afford to repay their loans. The proposed rule also would cut off repeated debit attempts that rack up fees and make it harder for consumers to get out debt, according a CFPB news release.
The proposed protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment and open-end loans.
“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” CFPB Director Richard Cordray said in the release. “By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail.”
Comments on the proposed rule are being accepted until Sept. 12. Comments can be made at www.regulations.gov.
Lender associations oppose the rule unless major changes are made, while consumer advocates applaud the rule.
Risky lending practices
According to the CFPB release, the bureau has serious concerns that risky lender practices in the payday, auto title and payday-installment markets are pushing borrowers into debt traps, and that financially vulnerable consumers are being set up to fail with loan payments they are unable to repay. The CFPB is concerned these practices lead to collateral damage in other aspects of consumers’ lives such as steep penalty fees, bank account closures and vehicle seizures.
“We have made clear our view that the credit products marketed to these consumers should help them, not hurt them,” Cordray said at a hearing on the issue June 2 in Kansas City, Mo. “And our research has shown that too many of these loans trap borrowers in debt they cannot afford.”
According to the CFPB, loans covered by the proposal include:
• Payday and other short-term credit products: Payday loans are generally due on the borrower’s next payday, which most often is within two weeks, and typically have an annual rate of 390% or even higher, according to the release. Single-payment auto title loans, which require borrowers to use their vehicle title for collateral, are usually due in 30 days with a typical annual percentage rate of about 300%. Most consumers end up racking up more fees and interest each time they reborrow, turning short-term loans into long-term debt traps, according to the release. CFPB research shows one-in-five payday loan sequences end up in default and one-in-five single-payment auto title loan borrowers end up having their car or truck seized by the lender for failure to repay.
• High-cost installment loans: The proposal would cover loans for which the lender charges a total, all-in annual rate that exceeds 36%, including add-on charges, and either collects payment by accessing the consumer’s account or paycheck or secures the loan by holding the title to the consumer’s vehicle as collateral.
The CFPB is also launching an inquiry into other products and practices that may harm consumers facing cash shortfalls.
Reaction
The Financial Services Centers of America, a trade association representing nonbank financial service centers, has posted a petition on its website opposing the short-term lending rules by the CFPB. FiSCA hopes to get 100,000 signatures for the petition drive.
“FiSCA believes from our meetings with the CFPB that the bureau has conducted no consumer research. That means that the CFPB has not interviewed a single customer who has utilized a payday loan,” said a statement posted on the FiSCA website.
Dennis Shaul, chief executive officer of Community Financial Services Association of America, said his group is prepared to sue if the “unworkable and detrimental” components of the CFPB’s proposal remain the same when the final rule is passed, according to an article in MarketWatch.
Meanwhile, the Consumer Federation of America supports the new rule.
“Payday loans result in long-term financial hardship and pile on overdraft and other fees that put borrowers’ financial security at risk,” Tom Feltner, the group’s director of financial services, said in a blog post on the organization’s website. Feltner was responding to the CFPB’s April report, “Online Payday Loan Payments.”
The CFPB’s proposed rule can be found at: http://www.consumerfinance.gov/policy-compliance/rulemaking/rules-under-development/notice-proposed-rulemaking-payday-vehicle-title-and-certain-high-cost-installment-loans.
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