Specifically, this new final rule rolls back previous important but modest underwriting provisions, which required lenders to establish the borrower’s ability to repay the loan according to the lender’s terms. Although the CFPB moved forward with implementing another important protection, the payment provision, the ability-to-repay standard is critical to protecting consumers from an endless, destructive debt cycle.
“The CFPB is empowering predatory lenders at a time when it should be focused on its mission, to protect consumers in the financial marketplace,” said Rachel Weintraub, Legislative Director and General Counsel with Consumer Federation of America. “Payday loans already disproportionately harm the financially vulnerable. To prioritize the payday loan industry over American consumers and their families during a financial crisis is not only cruel, but a failure to fulfill its mission.”
“At a time of unprecedented financial challenges, the CFPB has rolled back much-needed, yet insufficient, consumer protections, making it even easier for payday lenders to trap Americans in a devastating cycle of debt,” said Rachel Gittleman, Financial Services Outreach Manager with the Consumer Federation of America. “By disproportionately locating storefronts in majority Black and Latino neighborhoods, predatory payday lenders systemically target communities of color further exacerbating the racial wealth gap.”
Black Americans are 105% more likely than other races and ethnicities to take out payday loans, according to the Pew Charitable Trusts. Further, 17% of Black households were unbanked and 30% were underbanked, meaning they had a bank account but still used alternative financial services like payday loans, as opposed to 3% and 14% of white households respectively, according to a 2017 FDIC study. “Payday lenders prey on un- and underbanked Americans by offering short-term loans developed to trap borrowers in a debilitating cycle of debt,” Gittleman said.
The ability-to-pay provision would have required creditors offering payday loans and similar forms of credit to determine whether borrowers could afford loan payments in addition to other expenses. “The ability-to-repay standard was an important, modest step to ensuring that Americans could afford to repay the loan along with sky-high interest rates imposed by payday lenders,” Gittleman continued.
Payday loans, which often carry an annual interest rate of over 400%, trap consumers in a cycle of debt. The CFPB, itself, found that a majority of short-term payday loan victims are typically trapped in at least 10 loans in a row—paying far more in fees than they received in credit. Further, a super-majority of Americans, both Republicans and Democrats, support an interest rate cap of 36 percent. “Rather than siding with the public, the CFPB has horribly prioritized payday lenders over American consumers,” Gittleman stated
“In the absence of regulatory oversight, Congress must act to protect consumers from high-cost lending schemes,” stated Weintraub. “Rates on high-cost credit should be capped at 36% during the remainder of the COVID-19 emergency and its financial aftermath. Following a temporary fix, Congress must pass H.R. 5050/S. 2833, the Veterans and Consumers Fair Credit Act, to permanently cap interest rates at 36% for all consumers,” she concluded.
Susan K. Urahn and others, “Payday Lending in America: Who Borrows, Where They Borrow, and Why,” The Pew Charitable Trusts, July 2012. https://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/pewpaydaylendingreportpdf.pdf.
Rachel Weintraub, 202-939-1012
Rachel Gittleman, 609-571-5953