Contact: Kristin Lawton, 202.408.9788
Mar 27, 2015
Consumer Financial Protection Bureau Proposal Is Important First Step to Rein in Abusive Payday Lending Practices
Final Rules Need to More Forcefully Address Ability of Borrowers to Repay Loans and Ensure Online Lenders Follow State Consumer Protection Laws
Washington, D.C. – Statement by Andrea Levere, President of the Corporation for Enterprise Development (CFED), in response to Consumer Financial Protection Bureau payday lending proposal:
The preliminary proposal issued today by the Consumer Financial Protection Bureau (CFPB) is a critical first step to ensure that low- and moderate-income borrowers are protected from harmful payday lending practices. With their astronomical interest rates averaging just under 400%, the vast majority of borrowers cannot afford to pay off the loans within the allotted two-week period. Instead, they are forced to roll over the loans multiple times, incurring further debt and high fees, and creating a cycle of debt.
The CFPB proposal does much to rein in these practices, including protections against rolling over the same loan multiple times and prohibitions against mandatory check holding. The proposed rules also call for support of alternative, affordable small-dollar loans like those offered by many credit unions.
However, CFPB’s proposal falls short in two important areas.
The proposal outlines two methods to prevent short-term loans from creating a cycle of debt and would allow lenders to choose which method to use. Although the agency takes the key step of addressing the need for payday lenders to determine a borrower’s ability to repay the loan, only one of the two methods requires lenders to underwrite for ability to repay. The ability of borrowers to repay must be a fundamental starting point for all small-dollar lending.
The CFPB proposal also does not explicitly address the problem of unscrupulous online lenders who violate state consumer protection laws. Online lenders sometimes disregard the consumer protection laws that many states have passed to limit or prohibit lenders from making predatory loans to those states’ residents. CFPB has previously taken action against online lenders that have violated existing federal laws, and should take steps in the proposed rule to strengthen states’ capacity to protect their citizens from predatory loans made online as well as through traditional storefronts.
CFPB should include these important provisions in order to strengthen the forthcoming proposed rule.
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CFED empowers low- and moderate-income households to build and preserve assets by advancing policies and programs that help them achieve the American Dream, including buying a home, pursuing higher education, starting a business and saving for the future. As a leading source for data about household financial security and policy solutions, CFED understands what families need to succeed. We promote programs on the ground and invest in social enterprises that create pathways to financial security and opportunity for millions of people. Established in 1979 as the Corporation for Enterprise Development, CFED works nationally and internationally through its offices in Washington, D.C.; Durham, North Carolina, and San Francisco, California.