The Consumer Financial Protection Bureau is considering enacting new rules for the payday loan industry. The proposed regulations would require payday lenders to ensure that consumers who use their products can repay their loans.
The CFPB said the proposed new rules are designed to protect consumers from payday debt traps they said are a burden to millions of U.S. borrowers. Payday lenders, however, worry about the potential negative impact of the proposed rules on their businesses and borrowers who need access to credit.
“The rules I’ve read so far could very well put us out of business,” said Guy Shayler, owner of Westwood Check Cashing and Hollywood Check Cashing, both in Los Angeles. He said borrowers who take out short-term loans from his and other payday lending businesses often pay lower fees than if they had gone to a traditional bank. “Consumers need these short-term loans and if they can’t get them from providers like me who are regulated, they’ll go online to lenders who are not regulated by their state and pay higher rates,” he said.
Potential impacts
Shayler said the new rules were not well thought out or justified and don’t make sense for consumers or lenders. He said the new rules not only impact consumers who will have less access to loans but also would result in a loss of tax income for the government. “The payday lending industry employs thousands of people who would lose their jobs and won’t be paying taxes,” he said.
The initial rules were published in March 2015 and a final version is due soon. “We expect to release a Notice of Proposed Rulemaking (which is commonly referred to as a proposed rule) in the coming months,” Sam Gilford, spokesman for the CFPB, said in an email.
Ed D’Alessio, executive director of the Financial Service Centers of America, said the proposed rules are now technical concepts in a 57-page document and the industry will know more once the final regulations are released this year. “Right now, the predicted result from the new rules will be a constriction of the ability of consumers to access regulated credit products,” he said.
D’Alessio said his concern is the new restrictions will drive many borrowers to use unregulated credit sources such as loan products on the Internet or personal contacts that are not regulated by any U.S. government entity. He said unregulated products offer no protection or recourse for consumers.
While the CFPB acknowledges the need for these types of financial products for many consumers, agency officials say they have concerns regarding some of the business practices of some lenders such as allowing repeated rolling over of balances, holding borrower’s personal vehicles as security for loans, a lack of creating affordable payment structures and high fees for withdrawals — all of which they view as setting the stage for debt traps to occur.
“Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay,” CFPB Director Richard Cordray said in a press release when the proposed rules were announced last March. “The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.”
D’Alessio said the reason the CFPB may be pursuing new rules is because “they appear to have determined that borrowers that are in debt for any length of time are in harm’s way as opposed to the financial service industry’s view of what crisis did the consumer avoid by borrowing from a regulated lender and avoiding worse consequences.” He said the CFPB reached the conclusion on its own and not based on consumer complaints or research.
Prevent debt traps
The CFPB is proposing rules that encompass two different paths for helping consumers avoid debt traps: prevention and protection for both short and long-term loans. Lenders can decide which requirement pathway they want to follow.
Under the prevention portion of the rules for short-term loans, lenders would have to verify a consumer can pay back his loan on time including the principal, interest and all other fees. At the beginning of the process, lenders would be required to confirm a borrower’s income and other outstanding debts before granting him a loan. Additional rules come into play if a borrower wants a second or third loan, at which point lenders would have to determine that a borrower’s financial situation has improved adequately to take out another loan. D’Alessio believes this last requirement is “so far from reality as most of the time the situation for a borrower has worsened or is no better.”
Under the protection set of rules for short-term loans, lenders would be required to supply affordable payment alternatives and limit the number of successive loans a borrower could take out to prevent repeated rolling over of loans. The rules call for lenders to limit short-term loans to a total of 90 days or less within a 12-month time frame. The maximum number of rollover loans would be limited to no more than three.
D’Alessio said the granting of a second or third successive loan currently is only allowed after a lender has determined that a borrower can afford the payments. “An ability-to-pay analysis is already done,” he said. “The new proposals include presumptions regarding a consumer’s inability to pay. This is an unrealistic assumption by the CFPB as many borrowers are seeking loans because they find themselves in difficult circumstances.”
Other rules proposed by the CFPB to safeguard borrowers involve prevention and protection plans for long-term (45 days or more) loan products, cooling off periods and revising collection practices by lenders.
Freelance writer Carole Jakucs contributed to the writing and research of this article.
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