Banking & Credit

CFPB Proposes Sweeping Reforms to Stop Payday and Car Title Loan Debt Traps

Proposed Rule Creates Strong New Affordability Requirement, but Important Questions Remain

Washington D.C.—Today, the Consumer Financial Protection Bureau released a proposed rule to protect consumers from the harm caused by payday, car title and other abusive loans.  The rule, released in advance of a field hearing in Kansas City, Missouri includes many of the helpful provisions included in the first draft of the rule released in March 2015, but stops short of applying an ability to repay standard based on income and expenses to all payday and car title loans.

“The proposed rule released today is the best chance consumers have at avoiding further harm caused by payday and car title loans,” said Tom Feltner Director of Financial Services at Consumer Federation of America.  “Getting this rule right means requiring lenders to fully consider a borrower’s income and expenses and make a fair determination that, at the end of the month, there is enough money left to pay living expenses and loan payments without hardship or re-borrowing with additional interest.”

The proposed rule will improve upon existing consumer protections in states where payday and car title lending is authorized by:

  • Creating new consumer protections for short-term and long-term payday and car title loans – this broad scope is critical to prevent the widespread evasion tactics the industry has used to avoid complying with many state laws. The rule will apply to short- and long-term payday or car title loans and cover loans made by storefront and online lenders.
  • Requiring lenders to fully consider a borrower’s ability to repay a loan in full without hardship or additional borrowing – the proposed rule sets tough new standards for most loans and will require lenders to review income and expenses to ensure that the borrower has the capacity to make loan payments without falling behind on housing, food, child care, medical or other debts.
  • Protecting borrowers’ bank accounts – earlier this year, CFPB research found that online payday lending triggered at least one overdraft or NSF fee for about half of all borrowers and those borrowers paid an average of $186 in fees per year in addition to triple digit interest rates and other fees. The proposed rule would require lenders to notify borrowers of upcoming payments and contact a borrower after two unsuccessful attempts to collect a payment and reauthorize access to a borrower’s bank account.  The proposed rule would also prevent lenders from using other collection devices, such as a borrower’s debit card or electronic check to circumvent this protection.

“The CFPB is proposing sweeping changes to an industry that, for decades, has trapped millions of consumers seeking short-term credit in a long-term cycle of debt.  Borrowers will be better protected, but further changes are necessary to eliminate the harmful effects of triple digit interest rates and coercive collection practices,” said Feltner.

The final rule should include additional protections to prevent loopholes by requiring consideration of a borrower’s ability to repay for all loans without exception.  The proposed rule would allow lenders to make up to six loans per year without considering a borrower’s ability to repay the loan.  Even one unaffordable loan can cause long-term financial hardship.  This concerning exemption to the general ability to repay requirement should be removed in the final rule.

In the coming weeks, additional analysis of the proposed rule will be available.  For more information, contact Tom Feltner at 202-610-0310, or follow him on twitter at @tfeltner.

The Consumer Federation of America is a national organization of more than 250 nonprofit consumer groups that was founded in 1968 to advance the consumer interest through research, advocacy, and education.