CFPB regulates payday loans, auto-title loans

Ability-to-repay requirement is designed to stop cycle of debt

Fred O. Williams
Senior Reporter
Expert on consumer credit laws and regulations

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The federal government’s consumer watchdog regulated payday and auto-title loans Thursday, saying its rule is designed to stop the “debt trap” of repeat borrowing without cutting people off from emergency credit.

 “More than four out of five payday loans are re-borrowed within a month,” U.S. Consumer Financial Protection Bureau Director Richard Cordray said in remarks to reporters. “This cycle of piling on new debt to pay back old debt can turn a single unaffordable loan into a long-term debt trap.”

The long-anticipated regulation covers loans that come due all at once, including deposit advance loans and longer-term loans with a balloon payment, as well as payday and auto title loans. Payday loans typically have interest rates over 300 percent annualized.

Ensuring borrower’s ability to repay loans
The centerpiece of the rule’s protection is ensuring the borrower has the ability to repay. Lenders of loans of 45 days or less, or with a balloon payment, will have to determine the borrower’s ability to repay the loan within the time frame by verifying their income and considering their expenses. The number of loans made in quick succession is capped at three.

PAYDAY LOAN REGULATION
  • Ability to repay: Lender must verify income, check expenses to see if borrower can repay loan by due date.
  • Limit overdrafts: Lenders with access to your bank account are limited from attempting withdrawals, to reduce fees for insufficient funds.
  • Off-ramp: For short-term loans under $500, a lender is exempt from the ability to repay rule if it offers to stretch repayment over three installments.
  • Cooling-off period: Cap set of three loans in quick succession; mandatory cooling-off period of 30 days before another loan.
PAYDAY LOAN REGULATION
  • Ability to repay: Lender must verify income, check expenses to see if borrower can repay loan by due date.
  • Limit overdrafts: Lenders with access to your bank account are limited from attempting withdrawals, to reduce fees for insufficient funds.
  • Off-ramp: For short-term loans under $500, a lender is exempt from the ability to repay rule if it offers to stretch repayment over three installments.
  • Cooling-off period: Cap set of three loans in quick succession; mandatory cooling-off period of 30 days before another loan.

However, loans under $500 that allow repayment to be stretched out over three parts are exempt from the ability-to-repay requirement.

A broader protection in the rule applies to any loan over 36 percent interest in which the lender has access to the borrower’s bank account. The rule restricts lenders from making multiple withdrawal attempts from the account. Such withdrawals are cut off after two unsuccessful attempts, until reauthorized by the borrower, to limit overdraft fees.

“[O]verdue borrowers get hit with multiple fees and may even have their bank accounts closed,” Cordray said.

When rule is expected to take effect
The rule would take effect 21 months after it is published in the Federal Register, expected shortly – unless Congress acts to repeal it within 60 legislative-calendar days. Some Republican members have excoriated the draft of the rule released last year as government overreach that will deny access to emergency loans. The Financial CHOICE Act, backed by Rep. Jeb Hensarling, R.-Texas, and approved by the House in June, would forbid the CFPB from regulating payday loans.

Fifteen states already restrict or prohibit payday loans – the 35 that don’t have about 16,000 payday loan stores, Cordray said.

Consumer advocates praised rule
A coalition of consumer advocates, civil rights groups and faith leaders applauded the rule as a step toward ending a cycle of debt that harms consumers and undermines their communities.

“This new rule is a step toward stopping payday lenders from harming families who are struggling to make ends meet,” Center for Responsible Lending President Michael Calhoun said in a statement.

The rule is narrower than the draft payday rule the CFPB published for comment in June 2016. That rule included restrictions on high-cost installment loans, which were left out of the final rule. Thursday’s final rule also exempts lenders that make fewer than 2,500 short-term loans a year – generally community banks or credit unions making personal loans to members

Community banks issue statement on rule
“This exemption will enable community banks the flexibility to continue providing safe and sustainable small-dollar loans to the customers who need it most,” Independent Community Bankers of America President Camden Fine said in a statement. While not endorsing the rule, which it has not finished reviewing, the bank industry group noted the exemption.

 Also exempt are “payday alternative loans” authorized by the National Credit Union Administration and advances of earned wages from employers.

Payday loan industry criticizes rule
The payday lending industry hotly criticized the regulation, despite its reduction in scope, setting the stage for a fight over its survival in Washington. The Community Financial Services Association of America issued a statement calling the rule “hideously complex” and said it will result in consumers being cut off from credit.

“Millions of American consumers use small-dollar loans to manage budget shortfalls or unexpected expenses,” CEO Dennis Shaul said in the statement. “The CFPB’s misguided rule will only serve to cut off their access to vital credit when they need it the most.”

The restrictions will force many payday lenders out of business, the industry says. Shaul pointed to comments filed in the rulemaking process in favor of payday loans from more than a million payday loan users as evidence of the rule’s harm. However, repeated phrases in the supposedly individual comments have called their authenticity into question.

‘A commonsense rule’
CFPB attorney Brian Shearer said in a press call that the agency reviewed all comments, and gave them weight based on their substance. The CFPB estimates that borrowers would be able to get their initial loans 94 percent of the time under the rule, he said.

“This is a commonsense rule,” Shearer said. “It doesn’t ban payday loans.”

In a study in 2013, the CFPB found that nearly half of payday borrowers take out 10 or more payday loans a year. This group accounts for three-quarters of the industry’s total fees, the CFPB found. One in five auto title loans result in the borrower’s vehicle being repossessed, the agency said.

“Our research has shown that the business model for payday and auto title lenders is built on miring people in debt,” Cordray said.

See related: CFPB proposes regulations on payday loans, other “debt traps”


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Updated: 11-17-2017