The rule would cap the number of rollovers within a certain period of time and place limits on when and how lenders can gain access to money in consumers’ bank accounts. Even Google last month announce it would ban advertisements for payday loans, saying the industry creates “misleading or harmful products”.
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While the new CFPB rules mark an important step in limiting the predatory nature of payday loans, which rely primarily on poor and vulnerable people who lack the bargaining power to reject 400+ percent interest rates on loans, the rules are not without flaw.
In a statement Rutledge says she “appreciated the opportunity” but continued to push for a conference of states to discuss proposed regulations prior to implementation. Primarily, the full-payment test is only required for individuals taking out more than $500.
With approximately one in 20 Americans taking out payday loans each year, the multi-billion dollar industry has faced heavy criticism for creating a profit-oriented system where borrowers can not pay off loans and are forced to re-borrow.
CFPB officials concede they sought an elusive goal: Prevent borrowers from sinking into a debt trap while maintaining the viability of low-dollar lending. Comments are due by September 14.
Under the proposed rules, a lender may not issue a covered loan (or increase the credit available under a covered loan) to a consumer without first making a reasonable determination that the consumer will have the ability to make each payment under the loan at the time it is due.
Pew said the CFPB action also knocked out prospects for banks to join the ranks of small-dollar lenders. However, as demonstrated in a former Law Street piece, a loan with the average principal of $325, if renewed eight times (or over the course of four months) would cost the borrower $798-1.5 times the initial loan. “While the Bureau has frequently expressed interest in expanding banks’ trusted role in this market, the proposal fails to do so in a meaningful way and will significantly limit the availability of small-dollar credit”, said Virginia O’Neill, senior vice president of the American Bankers Association’s Center for Regulatory Compliance.
In Mississippi, the CFPB rules gained an endorsement from Bill Bynum, the head of Hope Enterprise Corp., a non-profit community development group and parent of Hope Federal Credit Union.
Rutledge met in Little Rock with Richard Cordray, director of the Consumer Financial Protection Bureau, a day ahead of a scheduled meeting in Little Rock of the bureau’s Consumer Advisory Board. Roughly 12 million Americans take out a payday loan each year, according to The Pew Charitable Trusts, who has done extensive research on the industry.
“Too many borrowers seeking a short-term cash fix are saddled with loans they can not afford and sink into long-term debt”, CFPB Director Richard Cordray said in a prepared statement.
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Automobile titles would also no longer be allowed as collateral. By sanctioning rollovers, which are evidence of inability to repay, and exempting six very high-cost loans annually from an ability-to-repay requirement, “the Bureau would undermine the basic principle of requiring universal ability-to-repay”, the CRL said in an analysis previous year of the rules the Bureau initially proposed.
