“Too many borrowers seeking a short-term cash fix are saddled with loans they can not afford and sink into long-term debt”, said CFPB head Richard Cordray. Instead, they target the kind of lending that can put borrowers into what are known as debt traps: where people borrow more than they can afford to repay, and take out more loans to pay back older ones. The rule would also prohibit lenders from repeatedly attempting to debit customer accounts, thus racking up expensive insufficient-funds fees.
Advertisement
More than 80% of auto title loans, transactions in which consumers pledge their vehicles as collateral, are rolled over or extended on the day they’re due because borrowers can’t afford to pay them in full, the CFPB also found.
For the first time, there will soon be broad rules protecting US borrowers from being stuck in a spiral of debt from loans that typically have rates of 390 percent and often higher.
Payday lenders, who have been bracing for new regulation by the CFPB since 2010, when the Dodd-Frank Wall Street financial reform law gave the agency authority over that part of the loan market, disagreed. Most of the borrowers, however, can not afford to pay the loan in full and so they pay off the interest and essentially take out a new loan for the same amount.
While according to consumer advocates, payday lenders had shown an ability to adapt and find loopholes in states that had tried to crack down, the industry finds the CFPB’s regulations needlessly stringent and says it fails to consider consumers who were being helped. The loans are often used to cover basic living expenses like rent or utility bills. Some lenders say that under the new rules fewer loans will get made; they’ll have no choice but to close up shop.
The average payday loan is about $375, according to Pew’s research. When making the initial loans, they are given either a postdated check or access to the borrower’s bank account. Lenders would be barred from offering this option to consumers who have outstanding short-term or balloon-payment loans or have been in debt on short-term loans more than 90 days in a rolling 12-month period.
For Elliot Clark, taking out a payday loan almost ruined his marriage and his family.
An option for lenders to offer two longer-term loan options with more flexible underwriting if the lanes pose less risk.
In the pipeline for some time, the controls seek to address a practice that provides a service, lending typically small amounts of cash on a short-term basis, but at significant cost, often charging triple-digit interest rates and stacking up overdraft fees against the borrowers. The new rules “provide more paperwork for the same 400 percent April loan”, he says. A 2013 report by the CFPB found that the median borrower took out 10 loans over the course of a year and spent $458 on fees. “Strong CFPB rules are badly needed, but this proposal focuses on the process of originating loans rather than making sure those loans are safe and cost less”.
“The bureau has prescribed a rule that fits its predetermined conclusions and will actually harm consumers’ financial well-being”, says Dennis Shaul, the group’s CEO.
High-cost lenders have always been a go-to source of cash for borrowers who either lack credit history or have credit scores too low to qualify for traditional lending. A core element of the proposed rules is an “ability-to-repay” standard. But if they don’t have the money to pay the loan back in full, it is common for them to take out a repeat loan.
The proposed rules will be open for public comment until September 14.
Advertisement
“The CFPB is taking a major step toward reining in predatory debt traps that exploit the financial struggles of millions of economically vulnerable Americans and often leave them worse off than before”, Carmel Martin, executive vice president of policy at the Center for American Progress, said in a statement.
