CFPB's Game-Changing Plans to Rein in Payday Lenders
- On March 26, the Consumer Financial Protection Bureau (CFPB) released a long-awaited proposal concerning short-term loans, most notably payday loans and similar products. The agency had previously released two studies on payday products and must now gather feedback from small businesses on the developing rules via a Small Business Review Panel. In prepared remarks, CFPB Director Richard Cordray said, "After much study and analysis, we are taking an important step toward ending the debt traps that are so pervasive in both the short-term and longer-term credit markets.” The rules will bring federal regulations to an industry that has traditionally fallen under the purview of state regulators.
- The proposals would include everything from income verification requirements to limits on how many loans individuals can borrow in a given period. Lenders will have the option to choose from among two sets of requirements. One set would help “prevent” debt traps by having requirements that focus on ability-to-repay and loan verification. The alternate approach would be intended to “protect” consumers from debt traps, focusing on fostering affordability through limits on rollovers and loan amounts. Products subject to the requirements would include short-term payday loans, deposit advance products, vehicle title loans, high-cost installment loans and open-end lines of credit.
- Short-term loans are defined as those shorter than 45 days. Prevention requirements would mean a 60-day “cooling off period” between loans, but multiple loans could be written if a lender can show that the finances of a consumer sufficiently improved, up to three per period. Protection requirements for loans no more than 45 days limit the amount borrowed to $500, permit only one finance charge, and do not force a borrower to use their vehicle as collateral.
- Longer term loans are defined as those lasting more than 45 days where a lender can access a borrower’s deposit account or paycheck, or share ownership of the individual’s vehicle. These loans also are defined as exceeding the “all-in” APR of 36 percent. The prevention option requires verification of income and prohibits refinancing if the borrower has delinquent payments. The bureau is still considering options for the protection approach, including a model that would cap interest at 28 percent with a $20 application fee. These loans would be limited to two in a six-month period. Another option under consideration would limit payments to five percent of the borrower’s monthly income. Collection practices for all products under the new rules would be under new CFPB scrutiny as well.
- American Banker (03/26/15) Adler, Joe