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CFPB Payday/Car-Title Proposal Reduces Debt Trap Lending, But Needs Strengthening

Thursday, June 2, 2016
Michael Calhoun

The Consumer Financial Protection Bureau (CFPB) today released proposed rules that, if strengthened, could rein in the worst abuses of payday and car-title lending. As written, however, the rule contains exceptions and loopholes that abusive lenders will use to evade the rule's protections and continue to trap vulnerable borrowers in unaffordable 300-plus percent interest loans.

In response to the proposed rule, Mike Calhoun, CRL President, issued the following statement:

At the heart of this proposed rule is the reasonable and widely accepted idea that payday and car title loans should be made based on the borrower's actual ability to repay – while still meeting other basic living expenses. Currently, the loan's business model allows for lenders to seize money directly from a borrower's bank account. Lenders easily and directly collect loans regardless of whether borrowers can afford the full repayment without defaulting on other expenses. Similarly, with car title loans, lenders threaten repossession of a borrower's car to coerce repayment.

Payday lenders collect 75 percent of their loan fees from borrowers with more than 10 loans per year. High-cost unaffordable loans lead to a cascade of financial consequences such as overdraft fees, bankruptcy, and loss of bank accounts. Data consistently show that these loans typically ensnare people into debt traps. The billion-dollar revenues generated from these loans are premised upon borrowers' inability to pay and the resulting lucrative turnstile of debt created with every loan renewal.

While acknowledging the ability-to-pay principle as an important first step, the ultimate goal of the rule should be to prevent consumer harm. As currently written, the rule contains significant loopholes that leave borrowers at risk, including exceptions for certain loans from the ability-to-repay requirement, and inadequate protections against "loan flipping" – putting borrowers into one unaffordable loan after another.

The rule's ability-to-repay test provides an exception for about six short-term payday loans annually. That's six too many. Even one unaffordable loan – much less six – can cause significant harm to borrowers, impacting their ability to manage other expenses and keep their bank account in good standing.

It also permits exceptions for certain long-term loans that could ultimately overburden borrowers with unaffordable debt.

Further, the protections against flipping borrowers from one short-term loan into another have been cut in half since the preliminary proposal last year. This change increases the possibility that lenders, by combining "exceptions" and other rules, could still keep borrowers in 10 or more 300-plus percent interest short-term loans in a year.

The rule also does not go far enough to prevent repeated refinancing of long-term loans. Any shortcomings in the longer-term portion of the rule are particularly concerning, as lenders have begun a significant expansion into the longer-term market in anticipation of stricter rules applied to short-term loans. These longer-term loans can be as toxic, or more so, than their short-term counterparts.

The final rule should:

  • Apply ability-to-repay requirements to every loan;
  • Increase protections against loan flipping; and
  • Be broadened to cover any loan that enables lenders to coerce repayment from borrowers.

Given the CFPB's lack of statutory authorization to set a usury limit, states will continue to play a critical role in the regulation of payday and car title loans. Fifteen jurisdictions prohibit high-cost payday loans altogether, while more than half of states prohibit triple-digit longer-term loans. All states have the authority to set reasonable interest rate limits of 36 percent, and they should move forward to do so.

For additional resources see:

For more information, or to arrange an interview with a CRL expert, please contact Charlene Crowell at charlene.crowell@responsiblelending.org or 919.313.8523