A recently released Consumer Financial Protection Bureau (CFPB) plan meant to end “payday debt traps” is meeting serious criticism from industry experts who say the rule, as proposed, would seriously limit short-term borrowing options for American consumers.
According to the CFPB, the proposed rulemaking would require lenders to take steps to ensure that consumers are capable of repaying their loans. The proposal is meant to tackle loans that can cause a “spiral of debt” when a consumer is unable to repay, often leading to exorbitant penalties and additional borrowing that can drag a consumer deeper into debt.
Critics of the proposal say it will limit Americans’ access to credit, both by requiring lenders to refuse to issue credit under certain circumstances, and by driving short-term lenders out of business. Consumers benefit from choice and are capable of making rational decisions regarding debt, critics have said.
Last week, all but one of Florida’s delegates to the U.S. House of Representatives issued a letter criticizing the proposed rules and urging the CFPB to use Florida’s payday lending laws as a model. “… [W]hile we strongly support meaningful and robust safeguards to prevent predatory lending practices in this market, we have continually insisted that any regulatory framework established be carefully balanced with the need to provide consumers with access to a range of financial services,” the representatives wrote in a letter addressed to CFPB Director Richard Cordray.
The CFPB’s proposed rulemaking targets payday lenders, vehicle title lenders and companies offering deposit advance products and certain high-cost installment loans and open-end loans. Under the rule, covered lenders must employ one of two approaches.
The first option, termed “debt trap prevention,” requires the lender to review the consumer’s income, financial obligations and borrowing history in order to determine at the outset whether the borrower is able to repay the loan, including interest, principal and fees. This plan also imposes a 60-day waiting period between loans unless the lender documents changes to the borrower’s financial circumstances that would allow for repayment without re-borrowing.
The second option, termed “debt trap protection,” requires the lender to provide affordable repayment options, as well as imposing a “cooling off” period between loans and limiting the number of loans a borrower can receive in a single year. Under this plan, the consumer’s vehicle cannot be used as collateral, the debt cannot exceed $500 and there cannot be more than one finance charge.
Certain of the proposed rules also would apply to lenders issuing credit products with interest rates exceeding 36 percent and terms longer than 45 days where payment is made via direct access to the consumer’s bank account or paycheck or where the lender takes a security interest in the consumer’s vehicle.
Finally, the proposed rules prevent lenders from withdrawing money directly from borrowers’ bank accounts unless they notify the borrower at least three days before the withdrawal. This rule is meant to reduce the number of overdraft fees imposed on consumers who have insufficient funds in their accounts.
Now that the CFPB has announced its proposed rulemaking, it will convene a Small Business Review Panel, during which time the CFPB will accept comments from industry representatives, advocacy groups and government officials. Members of the public will have an opportunity submit written comments once the CFPB publishes the proposed rule.
For a summary of the proposed rules, click here.