The CFPB today proposed a rule to eliminate what it calls “payday debt traps.” The rule would require payday lenders to make sure customers have the ability to repay their loans. The rule would also prohibit lenders from repeatedly attempting to debit customer accounts, thus racking up expensive insufficient-funds fees.
The proposed rule would cover payday loans, auto title loans, deposit advance products and some high-cost installment and open-end loans. the agency is also launching an inquiry “into other products and practices that may harm consumers facing cash shortfalls.”
“The Consumer Bureau is proposing strong protections aimed at ending payday debt traps,” said CFPB Director Richard Cordray. “Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt. It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey. By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail.”
The CFPB said it had “serious concerns” about common short-term lending practices. Often, the agency stated, borrowers are “set up to fail” by outsized loan payments they’re unable to make. “Faced with unaffordable payments, consumers must choose between defaulting, reborrowing, or skipping other financial obligations like rent or basic living expenses like food and medical care,” the CFPB stated.
The CFPB’s proposed rule would enact the following requirements:
- Full-payment test: Lenders would be required to determine if the borrower could afford to meet the full amount of each payment and still meet basic living expenses and other financial obligations.
- Principal payoff option for some short-term loans: This rule would allow customers to get a short-term loan of up to $500 without the full-payment test, but lenders wouldn’t be allowed to offer the option to consumers who had outstanding short-term or balloon-payment loans, or have been in debt on short-term loans for more than 90 days in a 12-month period. Lenders would also be barred from taking auto titles as collateral.
- Longer-term lending options: The rule would permit lenders to offer two longer-term loan options if they pose less risk. The first would be offering loans meeting the general parameters of the National Credit Union Administration’s “payday alternative loans” program, which caps interest rates at 28%. The other would be offering loans payable in “roughly equal installments” with terms of no more than two years and a total cost of 36% or less, not including a “reasonable origination fee.”
- Debit attempt cutoff: The rule would require lenders to give consumers written notice before trying to debit the customer’s account to collect payment. Following two unsuccessful attempts, the lender would be prohibited from debiting the account again without specific authorization from the borrower.
The CFPB is said the rule was necessary because practices currently common among short-term lenders “lead to collateral damage in other aspects of consumers’ lives, such as steep penalty fees, bank account closures, and vehicle seizures.”
But Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, said the proposal was yet another example of the overreach of which many lawmakers feel the agency is routinely guilty.
“Just days after the Federal Reserve reported that almost half of American families say they would struggle to pay for emergency expenses of $400, here comes Director Cordray to make their struggle even harder,” Hensarling said. “Accountable to no one, he alone decides for all Americans whether they can take out a small-dollar loan to meet emergency needs. … It’s sheer arrogance to believe this Washington rule will help them.”
Hensarling also accused Cordray of ignoring the will of state legislatures, which already regulate payday loans.
“Director Cordray is running rough-shod not only over consumers but also the democratically elected governments of all 50 states,” he said. “They already regulate small-dollar loans and possess full authority to address any abuses. When I asked Director Cordray (at a hearing last year) to identify states he believes do not adequately protect consumers of small-dollar lending, he declined to do so.”
Hensarling said Cordray also ignored requests by state leaders like Arkansas Attorney General Leslie Rutledge, who asked the CFPB to meet with states before crafting any new rules on payday lending.
“In doing so, Director Cordray wholly rejects the checks and balances built into our constitutional system of federalism that is – of at least once was – the hallmark of American government,” Hensarling said. “In its place, we are left with yet another one-size-fits-all Washington mandate from an unaccountable bureaucrat, the true legacy of Dodd-Frank.”
The Independent Community Bankers of America, meanwhile, said the rule needed to contain provisions that would allow banks to continue offering smaller loans.
"The rule must allow community banks to continue to have the flexibility to provide access to small-dollar credit, free of numerical and costly requirements in the underwriting process," the ICBA said in a statement.
What do you think? Is the CFPB right to clamp down on payday lenders, or is it overstepping its bounds? Let us know your thoughts in the comments below.
Editor's note: Updated to include statement from the ICBA.
The Consumer Financial Protection Bureau wants to clamp down on payday lenders, but the head of the House Financial Services Committee calls the proposed rule “sheer arrogance.”