Payday loans are loans in which the lender repays itself directly from the borrower’s bank account on the borrower’s payday. These loans are typically due in one lump sum. With a car title loan, the lender requires the power to immediately seize and sell the car as collateral, and uses this power to coerce payment.
By Marisabel Torres, Senior Policy Analyst, Economic Policy Project, NCLR
What a difference a year has made for consumers. A year ago today, consumer advocates celebrated the Consumer Financial Protection Bureau (CFPB)’s release of a proposed rule to reign in the worst abuses of payday, car title, and other high-cost debt trap lending schemes. For too long, predatory businesses targeted communities of color and other consumers who had limited access to credit with loans and promises of quick cash to help make ends meet. Because these businesses have been unregulated, they have gotten away with charging exorbitant fees and structuring their loan products to keep consumers in a cycle of debt. After hearing the countless experiences from consumers who were victims of these debt traps, the CFPB, an agency that was established with the sole mission of keeping the financial marketplace transparent and fair, stepped in and proposed a rule to stop these harmful practices.
Fast-forward to today: Congress stands poised to not only roll back the CFPB’s ability to regulate these businesses, but the very existence of the CFPB is threatened by an upcoming vote on the Financial CHOICE Act, H.R. 10. This legislation—dubbed the WRONG Choice Act by consumer advocates—will undo years of positive regulatory work intended to make sure payday lenders and other bad actors stay off the market, and that we don’t face the same conditions that led to the Great Recession.
Over the last few weeks, readers of NCLR’s blog series “Truth in Payday Lending” learned how the lack of regulation over the payday lending industry has harmed Latinos and other consumers who turn to these products in times of financial need. These unscrupulous and predatory lenders use a business model dependent upon a borrower’s inability to pay a loan. As a result, consumers have lost millions of dollars and been trapped in a cycle of debt.
NCLR and its partner organizations are encouraged by the newly proposed rule by the Consumer Financial Protection Bureau, which would address payday and car title lending—and end this cycle of debt. The proposed rule covers loans which, on average, carry more than 300% annual percentage rates (APR)—a rate much too high for consumers. CFPB’s proposal would establish an ability-to-repay principle for covered loans, based on a borrower’s monthly income and expenses. While this is already a principle for other types of loans, payday loans have not been subject to this important and fundamental determination of a borrower’s ability to afford a loan.
However, the CFPB’s proposal currently contains loopholes that would exempt certain loans from the ability-to-repay requirement. NCLR strongly believes that the rule should contain no exemptions to the loans that would be subject to this provision. In addition, protections against loan flipping, or re-borrowing additional loans to cover the cost of the original, need to be strengthened. Currently, the proposal has a waiting period of 30 days between loans, which NCLR believes should be lengthened to 60 days. Together, these provisions would allow borrowers to stay in the same cycle of unaffordable debt that many are facing now, undermining the protections the rule is supposed to put into place.
NCLR is advocating for the CFPB’s payday lending rule to:
Keep a strong ability-to-repay provision, without exceptions.
Consumers trapped in a cycle of debt got welcome news today as the Consumer Financial Protection Bureau (CFPB) announced new protections for payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans. The CFPB held a public hearing in Richmond, Va., to announce proposed rules that would end payday lending debt traps by requiring lenders to take steps to make sure consumers can repay these loans. The proposals under consideration would also restrict lenders from attempting to collect payment from consumers’ bank accounts.
NCLR supports strong protections for consumers when using financial products and services. In the case of the payday marketplace, this is not a small segment of consumers: research shows that 12 million Americans take out a payday loan each year. Of these consumers, four out of five are not able to pay it back within the original loan term, suggesting that the loan may not be affordable for the majority of consumers who use them.
While there is a definite need for small-dollar credit and loans, especially for low-income consumers and those who may be outside the financial mainstream, consumers should not end up in financial ruin as a result of taking out a loan. Unfortunately, research has shown that payday loan borrowers have been found to be indebted for more than half of the year as a result of taking out a payday loan.
NCLR supports a strong payday rule that will:
End the debt trap. An affordable loan should not need to roll over multiple times to pay off the original loan.
Have a strong ability-to-repay provision. Underwriting should take the borrower’s monthly expenses and obligations into consideration.
Establish a maximum length a borrower can be in debt, such as 90 days in a 12-month period.
The CFPB’s proposal recognizes that a crucial principle—ability to repay—must apply to a sufficiently broad range of small-dollar loans, not just to a narrowly defined set of payday or car- title loans. At the same time, however, parts of the CFPB’s proposal provide exceptions that could still result in harm to consumers. These “debt trap protection options” would permit payday lenders to continue making both short- and longer-term loans without determining the borrower’s ability to repay. Such exceptions would fail to end the debt trap business model that many in the industry use to make a profit.
This proposal is a huge step forward in the right direction—providing much-needed protections for products that have gone unregulated for far too long—and NCLR looks forward to working with the CFPB to improve this proposal so that all consumers who use small-dollar loans are protected from predatory practices.