Last week, the Consumer Financial Protection Bureau got the ball rolling to protect consumers from lenders from high interest payday loans, introducing their long-awaited proposed rules for small-dollar lending. The proposed rule sets critical standards for payday loans, car title loans, and similar types of credit that promise fast cash—for a steep price—in the 30 states that don’t already prohibit or significantly limit the practice.
The 1,500-page rule would require lenders to make sure borrowers can afford the payments on high-rate payday loans, and it would prohibit them from repeatedly overdrawing a borrower’s checking account to extract payments. It would also permit less underwriting scrutiny if the loan meets certain standards, such as a 28 or 36% APR cap.
But while the proposal is a major first step and could clean up the worst abuses in the high-cost lending market, there are some exemptions to the rule that concern consumer advocates.
For example, a key provision of the proposal requires lenders to determine if the borrower can afford to repay the full amount of the loan payments due, without having to re-borrow within 30 days. Research by the CFPB found that 80% of payday loans due in a single payment were refinanced with the same kind of high-price loan, often again and again.
But Tom Feltner, director of financial services at the Consumer Federation of America, sees a loophole that lenders could exploit to maintain business as usual. “There is an exemption that allows lenders to make up to six loans per year without determining ability to repay—if the loan is for $500 or less. We think one unaffordable loan is too many,” says Feltner.
Alex Horowitz, senior officer with The Pew Charitable Trusts, slammed the CFPB proposal. “Borrowers are looking for three things from payday loan reform: Lower prices, small installment payments, and quick loan approval. The CFPB proposal went zero for three,” says Horowitz.
Under the proposed rule, Horowitz says a payday installment loan of $400, repaid over three months, will still cost a borrower $350 to $400 in fees.
Sam Gilford, a CFPB spokesman, says the rule is only a proposal at this stage, and “we’re asking the public for comment.” It may take one to two years for the CFPB to review public comments, issue a revised proposal or final rule, and set an effective date for implementation.
We’re waiting on further analysis of the measures and will report back in future issues on the up an down sides of the proposed new rules. ¦
