Consumers trapped in a cycle of debt got welcome news today as the Consumer Financial Protection Bureau (CFPB) announced new protections for payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans. The CFPB held a public hearing in Richmond, Va., to announce proposed rules that would end payday lending debt traps by requiring lenders to take steps to make sure consumers can repay these loans. The proposals under consideration would also restrict lenders from attempting to collect payment from consumers’ bank accounts.
NCLR supports strong protections for consumers when using financial products and services. In the case of the payday marketplace, this is not a small segment of consumers: research shows that 12 million Americans take out a payday loan each year. Of these consumers, four out of five are not able to pay it back within the original loan term, suggesting that the loan may not be affordable for the majority of consumers who use them.
While there is a definite need for small-dollar credit and loans, especially for low-income consumers and those who may be outside the financial mainstream, consumers should not end up in financial ruin as a result of taking out a loan. Unfortunately, research has shown that payday loan borrowers have been found to be indebted for more than half of the year as a result of taking out a payday loan.
NCLR supports a strong payday rule that will:
- End the debt trap. An affordable loan should not need to roll over multiple times to pay off the original loan.
- Have a strong ability-to-repay provision. Underwriting should take the borrower’s monthly expenses and obligations into consideration.
- Establish a maximum length a borrower can be in debt, such as 90 days in a 12-month period.
The CFPB’s proposal recognizes that a crucial principle—ability to repay—must apply to a sufficiently broad range of small-dollar loans, not just to a narrowly defined set of payday or car- title loans. At the same time, however, parts of the CFPB’s proposal provide exceptions that could still result in harm to consumers. These “debt trap protection options” would permit payday lenders to continue making both short- and longer-term loans without determining the borrower’s ability to repay. Such exceptions would fail to end the debt trap business model that many in the industry use to make a profit.
This proposal is a huge step forward in the right direction—providing much-needed protections for products that have gone unregulated for far too long—and NCLR looks forward to working with the CFPB to improve this proposal so that all consumers who use small-dollar loans are protected from predatory practices.