The Inclusive Economy
CFED Applauds Proposed Payday Lending Rules; Urges Even Stronger Consumer Protections
By Anju Chopra and Emanuel Nieves on 06/09/2016 @ 04:00 PM
One week ago today, the Consumer Financial Protection Bureau (CFPB) released their highly anticipated proposal to stop the debt trap by regulating predatory small-dollar credit products, such as payday and auto-title loans. The proposal, which was released at a field hearing in Kansas City, clocks in at a whopping 1,300 pages, a testament to the complexity of establishing comprehensive rules to protect consumers against small-dollar loans. Given that only 14 states and the District of Columbia currently have laws protecting consumers from predatory lenders, CFED believes that the Bureau’s proposed regulations are a critical step to ensuring that everyone in this country can avoid the debt trap perpetuated by this unscrupulous industry.
CFED applauds the CFPB for putting together a thoughtfully crafted and comprehensive rule that will go a long way toward protecting consumers from some of the most dangerous small-dollar lending practices. CFED also believes there are clear ways the rule could be strengthened, and we are already formulating comments to share with the CFPB regarding how to ensure the rules go as far as possible to protect the vulnerable consumers who need these protections the most.
While our work to analyze the proposed rules continues, the following are CFED’s preliminary assessments of the strengths and weaknesses of what the Bureau has proposed:
There is much to celebrate about the Bureau’s proposal, including:
- Scope of Regulation: Although the rule should apply to a wider variety loan products (more details on that below), the attention to detail and expansiveness of the rules in their current form is impressive, and signals the Bureau’s commitment to protecting consumers. The proposal covers many expensive small-dollar credit products—including payday, auto title and several high-cost installment loans—and it covers loans of both shorter and longer durations. While shorter-term loans are the bedrock of the small-dollar lending industry, there is an increasing movement toward lengthier installment loan terms. Therefore, a strong rule accounts for these longer-term loans, and we applaud the CFPB for including them in their proposal.
- Ability to Repay Requirement: At the core of the CFPB’s proposal is the stated principle that payday and auto-title loans should only be extended to borrowers that can demonstrate the ability to repay the loan without re-borrowing, neglecting their other major financial obligations or forgoing basic living expenses. This is a practice that is seen in almost all other forms of lending, but is intentionally absent in payday lending practices, where the business model relies on keeping borrowers in cycles of debt over long periods of time.
- Restrictions on Account Access: The small-dollar lending industry has an excessive amount of access to a borrower’s bank account or vehicle title, which effectively places the lender’s ability to collect in higher regard than the borrower’s ability to prioritize and pay household expenses or make choices about budgeting. The new rule includes provisions that take away some of this control by requiring that lenders give notice before money is removed from an account, as well as placing restrictions on the number of times a lender can access an account.
Opportunities to Make the Regulations Even Stronger
Despite these strengths, there are areas in which the proposed rules could offer stronger consumer protections:
- Exemptions from Ability to Repay Requirement: As welcome and as needed as the ability to repay underwriting requirement is, the CFPB’s proposal exempts certain short- and long-term loans from this requirement, so long as the loans are structured to meet certain consumer-friendly guidelines (e.g., capping the interest rate, capping the amount of credit that can be extended to a borrower). However, under the guidelines for some of these exempted loan types, lenders can still easily find ways to continue providing consumers with loans that are unaffordable, further perpetuating the debt trap that this market has sustained for years. Below are examples of a few of these potential problems.
- Dangerous Loophopes: If a lender waits at least 72 hours after issuing a loan (with terms of 45 days or more) to access the borrower’s deposit account, paycheck or vehicle title, that loan becomes exempt from the rule. We see clear potential for this provision to be abused by lenders and believe it should be removed to ensure borrowers are fully protected.
- Perverse Incentives for Lenders: As written, the proposal would use a lender’s re-borrowing rates as a proxy to determine how well they are adhering to the ability to pay requirement. Instead of encouraging lenders to only provide loans that consumers can repay, this proposal might just incentivize them to get more aggressive when it comes to collecting on their loans. Lenders already require access to a borrower’s bank account or vehicle title before issuing a loan, which puts borrowers in vulnerable position that could be made worse by this.
- Protections against Loan Flipping: While the proposal tackles the problem of “loan flipping”—where an initial debt is rolled over repeatedly into new debt (an activity commonly considered predatory)—it doesn’t go far enough. In the preliminary proposal released last year, the Bureau established a 60-day “cooling off” period between loans. In the latest version, they have cut this period in half, allowing lenders to extend another loan only 30 days after the original loan, meaning a consumer could take out as many as a dozen loans per year. The small-dollar industry relies on repeated rollovers and new loan extensions to maximize profits, a process that strips an unacceptable amount of wealth from borrowers who are often low-income. The 60-day period was much better for consumers, and we see a longer “cooling off” period as essential to protecting consumers.
The Road Ahead
Over the past year, CFED and our partners have used the #ConsumersCantWait campaign to encourage the CFPB to release strong payday lending rules. Now that the rules have been proposed, the campaign is kicking into high gear. The Bureau has invited feedback on their proposal, and CFED will write a comment letter that recommends improvements to the rule. When the comment letter is complete, we will share it with our #ConsumersCantWait campaign partners, members of the Assets & Opportunity Network and others to sign onto the letter to show support for the strongest rules possible. We will also provide sample comment letters to partners who want assistance creating their own letters.
In addition, there a number of other ways you can help ensure the strongest protections possible. In the coming months, we will continue to make resources available through our #ConsumersCantWait toolkit. Intense pushback on the rule from the payday industry has already begun, so it is critical that consumer advocates use these tools to ensure that the CFPB hears the voices and needs of consumers. We will also be hosting a webinar in the next few weeks that will explain the rules in more detail and provide guidance on other ways to be engaged during the comment period. Finally, we’ll be updating you via email and on our blog of upcoming opportunities to advocate.
It is because of partners like you that consumers will soon be protected from unscrupulous, predatory lenders. Thank you for all you do to create a more inclusive economy!