We joined the CFPB in Richmond Thursday for a field hearing on a proposed rule to regulate payday lending and similar high-cost short-term loans. The CFPB's draft rule is comprehensive, covering a variety of loans, but it contains potential loopholes that we and other advocates will urge the bureau to close before it finalizes this important effort. The CFPB will post a video archive of the Richmond event here soon. It was packed, first with Virginia consumer advocates led by a faith community of all denominations, united against usury that harms their congregations. But the payday lenders were there in force, as well; they must have closed all the stores, or left them with one staffer in charge.
Payday loans are high-cost short term loans at rates as high as 1000% APR or more. Originally and still made in storefronts in the states that have legalized the loans, the loans are now increasingly made by online lenders with the ability to invade states where high-cost lending is illegal. In other states that have banned the loans, payday lenders "morph" the structure of the loan to avoid the regulation, by, for example, adapting a two-week closed end loan into an installment loan, but still at high rates. An even more draconian product, the auto title loan, is legal in some states, including Virginia, where the hearing was held. While payday lenders threaten to cash your check, which they know will bounce, to force you to pay, the car title lenders have a bigger cudgel; they simply take your car for an unpaid loan, leaving you no way to get to work.
If you borrowed $300 from a payday lender with a fee of $60, you probably don't have $360 on payday. So, the lender allows you to "roll it over" for an additional $60 fee. Many consumers end up paying much more in fees than the original $300 that they borrowed. This is the"debt trap."
As I testified Thursday, the states have done yeoman work trying to rein in the lenders, but it's a game of whack-a-mole at the state level. That's why we need a strong, enforcable national rule. As CFPB Director Richard Cordray pointed out in his opening remarks:
"Extending credit to people in a way that sets them up to fail and ensnares considerable numbers of them in extended debt traps, is simply not responsible lending. It harms rather than helps consumers. It has deserved our close attention, and it now leads to a call for action. So after much study and analysis, we are taking an important step toward ending the debt traps that are so pervasive in both the short-term and longer-term credit markets. Today we are outlining a proposal that would require lenders to take steps to make sure borrowers can repay their loans. The rules we are considering would cover payday, vehicle title, and certain high-cost installment loans. We have released an outline of the proposals we are considering, and we invite feedback on our approach. This is the first step in addressing much-needed change."
The CFPB's release goes into greater detail and includes additional links. Excerpt:
"Today, the Bureau is publishing an outline of the proposals under consideration in preparation for convening a Small Business Review Panel to gather feedback from small lenders, which is the next step in the rulemaking process. The proposals under consideration cover both short-term and longer-term credit products that are often marketed heavily to financially vulnerable consumers. The CFPB recognizes consumers’ need for affordable credit but is concerned that the practices often associated with these products – such as failure to underwrite for affordable payments, repeatedly rolling over or refinancing loans, holding a security interest in a vehicle as collateral, accessing the consumer’s account for repayment, and performing costly withdrawal attempts – can trap consumers in debt. These debt traps also can leave consumers vulnerable to deposit account fees and closures, vehicle repossession, and other financial difficulties. The proposals under consideration provide two different approaches to eliminating debt traps – prevention and protection. Under the prevention requirements, lenders would have to determine at the outset of each loan that the consumer is not taking on unaffordable debt. Under the protection requirements, lenders would have to comply with various restrictions designed to ensure that consumers can affordably repay their debt. Lenders could choose which set of requirements to follow.
Ending Debt Traps: Short-Term Loans:
The proposals under consideration would cover short-term credit products that require consumers to pay back the loan in full within 45 days, such as payday loans, deposit advance products, certain open-end lines of credit, and some vehicle title loans. Vehicle title loans typically are expensive credit, backed by a security interest in a car. They may be short-term or longer-term and allow the lender to repossess the consumer’s vehicle if the consumer defaults. For consumers living paycheck to paycheck, the short timeframe of these loans can make it difficult to accumulate the necessary funds to pay off the loan principal and fees before the due date. Borrowers who cannot repay are often encouraged to roll over the loan – pay more fees to delay the due date or take out a new loan to replace the old one. The Bureau’s research has found that four out of five payday loans are rolled over or renewed within two weeks. For many borrowers, what starts out as a short-term, emergency loan turns into an unaffordable, long-term debt trap. The proposals under consideration would include two ways that lenders could extend short-term loans without causing borrowers to become trapped in debt."
Americans for Financial Reform issued a short release that includes links to many other consumer group statements: Excerpt from AFR:
"We are very concerned that parts of the CFPB’s proposal provide dangerous exceptions to a meaningful application of the ability-to-repay principal to both short- and longer-term small dollar loans. These exceptions would invite continuing abuse, while putting state protections at risk and undermining the push to end the debt-trap business model."
The National Consumer Law Center's news release explains that the proposal, which is in early stages, needs to be upgraded to provide both prevention and protection.
Despite the strong fundamentals of the CFPB’s approach, loopholes would permit some unaffordable high-cost loans to stay on the market. The CFPB has taken an ‘either/or’ approach: ‘prevention or protection.’ But borrowers need both. Lenders must be judged both on whether they evaluate affordability before making a loan and also on whether those loans default, rollover or are refinanced in significant numbers."
So, the CFPB is off to a good start, but the proposal needs some fine-tuning.
PHOTOS: At top left, Director Cordray addresses the crowd. Middle-right: Virginia Attorney General Mark Herring says he doesn't like "Virginia's image as the predatory lending capital of the East Coast" and intends to do something about it. Bottom right from left, Virginia Interfaith Center director Marco Grimaldo with featured panelists Mike Calhoun of the Center for Responsible Lending and Wade Henderson of the Leadership Conference on Civil and Human Rights.