NCLR Welcomes Proposed CFPB Regulations that Would End Debt Traps

Photo: Dan Iggers

Photo: Dan Iggers

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.

CFPB_LogoThe 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.

Leveling the Playing Field in Car Lending

CFPB_autorule

Photo: Daniel Oines, Creative Commons

More than five years after the U.S. government bailed out car manufacturers, the auto industry is booming once again. Last year, consumers purchased more than 15 million cars, the most since 2007, and sales this year are expected to top 17 million, based on data from the National Automobile Dealers Association. Latinos are fueling much of this growth. According to Polk research, Latinos spent $39 billion on new vehicles last year, representing 20 percent  of new vehicle sales.

It is easy to see why car sales are booming. With more than 85 percent of the U.S. workforce using an automobile to commute to work, cars have become a necessity. Car ownership is no longer a luxury but is a prerequisite to economic opportunity. The need for a car is particularly true for many low- and moderate-income families and communities of color who live or work beyond the reach of public transit systems. For these families, cars are their most significant asset, and many of them rely on loans to finance the purchase of these assets.

Through the first three quarters of 2014, U.S. households owed approximately $935 billion in outstanding auto loans, an amount that has been increasing steadily for more than three years. Today, there are more auto loans than mortgages in the United States, and new auto loan originations are at volumes not seen since 2005.

Despite the importance of cars and car lending for U.S. consumers, auto finance is marked by a noted lack of regulation and transparency. As a result, predatory practices have been allowed to thrive, leading to unnecessarily expensive and unsustainable loans, particularly for those least able to afford it. Those with subprime credit are particularly at risk of being burdened with these predatory practices due to fewer direct auto financing options available to them. For example, recently, the U.S. government entered into a consent order with a major auto lender, ordering it to pay $98 million in damages to Latino and Black borrowers who were being charged higher interest rates for their auto loans than similarly situated White borrowers. Further complicating matters, the auto lending market is a fractured one, with a wide array of lenders, each of which is targeting particular borrowers.

CFPB_LogoThis week, the Consumer Financial Protection Bureau (CFPB) is collecting comments on a rule aimed at bringing more order and increased accountability to the auto lending market, by better defining the automobile financing market and the larger participants within that market. This rule will potentially benefit a significant number of consumers by extending regulatory oversight to most nonbank financial institutions and ensuring these institutions comply with consumer financial protection laws and regulations.

We support and commend the CFPB’s efforts to improve transparency and accountability in auto lending by extending its supervision to nonbank auto lenders, such as “Buy Here Pay Here“ lenders, leasing companies, and companies servicing installment auto loans. This supervision will bring much-needed attention to otherwise lightly regulated companies, and will ensure that auto financing by banks, already subject to CFPB supervision, is not at a competitive disadvantage.

We also urge the CFPB to continue its efforts to get rid of discriminatory practices in auto lending by requesting comments on a rule to prohibit mark ups by auto dealers on the interest rates charged by auto lenders. This practice has a long history of leading to racial discrimination and the CFPB should use its rulemaking authority to squeeze it out of the market once and for all.

FDIC and OCC Guidance Aims to End Predatory Small-Dollar Loans

Making good on their promises to protect consumers from predatory lending and abuse in the wake of the recession, government agencies are cracking down on payday loans.  This week, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) released new guidance over the lending of payday-type products offered by the financial institutions under their oversight.

With this new FDIC and OCC action, harmfully designed and largely unregulated loan products commonly aimed at low-income communities can no longer be offered by banks.  With features such as triple-digit interest rates, no certification of borrowers’ ability to repay, and automatic repayments deducted immediately from a borrower’s next paycheck, these loans trap borrowers in a cycle of debt and poverty.  Continue reading