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CFPB's Preliminary Proposal to Address Payday and Similar Debt-trap Loans

March 30, 2015
Research

On March 26, the Consumer Financial Protection Bureau offered a first look at proposals under consideration to curb the payday loan debt trap. The consumer agency released information outlining their deliberations at a field hearing in Richmond, VA – at which the agency also heard from a panel of consumer and civil rights advocates, as well as payday industry representatives.

The proposal released contains two main parts:

  • Short-term loans (45 days or less)
    The proposal for short-term loans would provide the lender with two options:
    • Determine ability-to-repay at the front-end, based on a borrower's income and financial obligations, or
    • For loans $500 or less, not determine ability-to-repay at the front-end but limit rollovers to two series of three loans, and no more than 90 days' total indebtedness in a twelve-month period
  • Longer-term loans (Terms longer than 45 days where the lender has access to the borrower's checking account—through a post-dated check or electronic authorization—or holds security to the borrower's car, and the all-in APR is greater than 36%)
    The proposal for longer-term loans would again provide the lender with two options:
    • Determine ability-to-repay at the front-end, based on income and financial obligations, or
    • For loans six months or less, the Bureau is considering two possibilities:
      • For loans $200-$1,000, offer terms generally consistent with the National Credit Union Administration's existing small-dollar loan program, or
      • Limit loan payments to 5% of the consumer's gross monthly income (with no consideration of expenses).

For both types of loans, CRL strongly opposes any exemptions from an ability-to-repay (ATR) requirement. The Dodd-Frank Act and the CFPB have established the importance of ability-to-repay in mortgage lending and the concept should extend as a requirement for all lending.

An ability-to-repay requirement is particularly important for payday loans, where the market incentive to underwrite is flipped on its head because the lender holds first-in-line access to the borrower's checking account. In this context, the lender is counting not on the borrower's ability to repay the loan, but rather on their ability to collect on the loan, whether the borrower can afford to repay it or not.

Indeed, because substantial lender revenue is derived through loan flipping – which occurs when the loan is not affordable – the lender has a disincentive to lend to borrowers who do have the ability to repay.

The full analysis (or attachment) (instead of "comment") (5 pages) goes into further detail about both the proposal and CRL's response to the proposal.