Quick Hit Ellyn Fortino Thursday June 2nd, 2016, 4:19pm

Federal Consumer Watchdog Proposes Crackdown On Payday Lending Practices

The Consumer Financial Protection Bureau (CFPB) proposed new regulations Thursday to crack down on the payday lending industry. 

Payday lending provides short-term access to credit, but usually comes with high interest rates, often in the triple digits, and expensive fees.

"The consumer bureau is proposing strong protections aimed at ending payday debt traps," CFPB Director Richard Cordray said in a news release. "Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt. It's much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey. By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail."

The proposed rule applies to payday, auto title and certain high-cost installment loans. 

Under the regulations, lenders would have to determine whether borrowers have the ability to repay their loans and give borrowers written notice before trying to debit their bank accounts to collect loan payments, among other requirements.

Borrowers can be hit with hefty bank fees when online payday lenders attempt to collect loan payments. With the new regulations, a lender could not make more than two debit attempts when payments fail, "unless the lender gets a new and specific authorization from the borrower," according to the consumer bureau.

CFPB has found that four out of five payday loans are rolled over or reborrowed, and payday borrowers end up in default 20 percent of the time. Additionally, one in five borrowers using a single-payment auto title loan eventually have their vehicle seized by a lender because of a failure to repay.

"Payday lenders offer a quick way to make ends meet, but often with devastating consequences," U.S. Sen. Durbin Durbin (D-IL) said in response to CFPB's proposed regulations. "Lenders are, in many instances, making these loans knowing that the consumer does not have the ability to repay them. This forces borrowers to choose between default and repeated borrowing, which perpetuates a cycle of debt. I commend the CFPB for taking action to end the payday loan debt trap.  It's the right thing to do to protect working families and consumers."

U.S. Rep. Luis Gutierrez (D-IL,4) said the payday industry is operating in a "Wild, Wild West" environment that needs to be reined in. He issued a statement applauding the CFPB's payday lending crackdown:

As far as consumers are concerned, it's like the Wild, Wild West, with minimal rules and even less enforcement when it comes to payday lending, car note lending, and other lending that preys on people with modest incomes.  The CFPB was created precisely to add transparency, accountability, and reliability to financial markets on behalf of American consumers, so I am glad they are addressing the payday loan arena and will rein in some of the excesses.

These lenders are taking a big bite out of low- and medium-income borrowers, exploiting their lack of choices and shaking down hard-working men and women.  I have tried to address this through legislation, but I was always up against a very powerful and well-funded lobby and they work on politicians at the state and federal level in both parties.  I think the CFPB will be able to rise above the self-interested lobbying and be a fighter for average men and women who have gotten or could get fleeced by these lenders. It is great that CFPB is on the case.

Dennis Shaul, CEO of Community Financial Services Association of America, which represents the payday lending industry, argues that the proposed rule would "actually harm consumers' financial well-being." Lenders, he said, may have to close as a result of the regulations, which do "nothing to address the ongoing problem of illegal lenders." Shaul released this statement: 

The CFPB's proposed rule presents a staggering blow to consumers as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense. It also sets a dangerous precedent for federal agencies crafting regulations impacting consumers.

From the beginning this rule has been driven - and in some instances written - by self-proclaimed 'consumer advocacy' groups who have sought to eliminate payday lending. The bureau took up the advocates' agenda, relied on non-quality research, and conducted a rulemaking process while maintaining an already hardened and biased view of payday loans and how consumers use these products.

In the best interest of consumers, the bureau should have determined the true impact of payday loans on consumer welfare. Instead, the bureau has prescribed a rule that fits its pre-determined conclusions and will actually harm consumers' financial well-being.

By the bureau's own estimates this rule will eliminate 84 percent of loan volume thereby creating financial havoc in communities across the country. Thousands of lenders, especially small businesses, will be forced to shutter their doors, lay off employees, and leave communities that already have too few options for financial services.

The Federal Reserve reported last week that forty-six percent of Americans cannot pay for an unexpected $400 expense. What is missing in the bureau's rule is an answer to the very important question, 'Where will consumers go for their credit needs in the absence of regulated nonbank lenders?'

The bureau's rule does nothing to address the ongoing problem of illegal lenders in this market. A borrower's experience with a payday loan depends greatly on whether they borrow from a legal, licensed lender or an illegal, unlicensed lender. The two are not equal options, and this is apparent in borrower surveys and the bureau's own complaint data.

Patriotic Millionaires for Fiscal Strength, which supports "a more regulated payday lending industry that allows for profit, but not at the cost of entrapment," took a different view. The group of 200 high-net-worth Americans said CFPB's proposed rule represents a "victory for working families in America who fall prey to financial exploitation."

"We don't think it is right for lenders to loan money disregarding a borrower's inability to repay, intending to make profit on the resulting fees and eventual default," said Patriotic Millionaires' chairperson Morris Pearl, former managing director at the investment management firm BlackRock Inc. "The payday lending industry should not have a business model of trapping average Americans in the cycle of debt."

The Chicago-based Woodstock Institute, a research and policy organization focused on fair lending and other issues, backs the rule too. However, the group would like to see the ability to repay standard extended to all loans.

"The Consumer Financial Protection Bureau's proposed rule on payday and car title lending is a good beginning, but there is still much work to be done to ensure this rule truly protects consumers from the legalized loan sharks who prey on our communities," said Woodstock Institute President Dory Rand. "Fortunately, this is just the opening offer. Our community will be working hard over the next few months to help the CFPB understand the importance of closing loopholes in what is otherwise a well-thought out proposal. In doing so, they can shut the debt trap once and for all.
 
"Woodstock Institute strongly supports and applauds CFPB's proposed use of a real 'ability to repay' standard for most payday and lump sum auto title loans and other provisions that stop the debt trap for vulnerable borrowers," she added. "We urge CFPB to strengthen the final rule by applying the ability to repay standard to all loans."

CFPB is accepting public comment on the proposed rule through September 14.

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