June 2, 2016

CFPB: Rule Proposed to End Payday Debt Traps

WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) today proposed a rule aimed at ending payday debt traps by requiring lenders to take steps to make sure consumers have the ability to repay their loans. The proposed rule would also cut off repeated debit attempts that rack up fees. These strong proposed protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment and open-end loans. The CFPB is also launching an inquiry into other products and practices that may harm consumers facing cash shortfalls.

“The Consumer Bureau is proposing strong protections aimed at ending payday debt traps,” said CFPB Director Richard Cordray. “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 would apply to certain short-term and longer-term credit products that are aimed at financially vulnerable consumers. The Bureau has serious concerns that risky lender practices in the payday, auto title, and payday installment markets are pushing borrowers into debt traps. Chief among these concerns is that consumers are being set up to fail with loan payments that they are unable to repay. Faced with unaffordable payments, consumers must choose between defaulting, reborrowing, or skipping other financial obligations like rent or basic living expenses like food and medical care. The CFPB is concerned that these practices also lead to collateral damage in other aspects of consumers’ lives such as steep penalty fees, bank account closures, and vehicle seizures. Loans covered by the proposal include:

A summary of CFPB research on payday and installment loans is available at: https://files.consumerfinance.gov/f/documents/Payday_Loans_Highlights_From_CFPB_Research.pdf

Proposal to End Debt Traps

The CFPB is proposing a rule that would put an end to the risky practices in these markets that trap consumers in debt they cannot afford. The proposed ability-to-repay protections include a “full-payment” test that would require lenders to determine upfront that consumers can afford to repay their loans without reborrowing. The proposal includes a “principal payoff option” for certain short-term loans and two less risky longer-term lending options so that borrowers who may not meet the full-payment test can access credit without getting trapped in debt. Lenders would be required to use credit reporting systems to report and obtain information on certain loans covered by the proposal. The proposal would also limit repeated debit attempts that can rack up more fees and may make it harder for consumers to get out of debt.

Specifically, the proposal includes the following protections:

This proposed rulemaking is the latest step in the CFPB’s efforts to reform the markets for these payday and installment loan products. The Bureau already exerts supervisory oversight of payday lenders and takes enforcement actions as appropriate to address violations of the law. With its action today, the Bureau continues to seek input from a wide range of stakeholders by inviting the public to submit written comments on the proposed rule once it is published in the Federal Register. Comments on the proposal are due on Sept. 14, 2016 and will be weighed carefully before final regulations are issued.

A factsheet summarizing the proposed rule is available at: https://files.consumerfinance.gov/f/documents/CFPB_Proposes_Rule_End_Payday_Debt_Traps.pdf

The CFPB’s proposal will be available at: https://files.consumerfinance.gov/f/documents/Rulemaking_Payday_Vehicle_Title_Certain_High-Cost_Installment_Loans.pdf

The proposed model disclosure forms are available at: https://files.consumerfinance.gov/f/documents/1_-_Proposed_Model_Forms.pdf

Inquiry into Emerging Risks

Today, the CFPB is also launching an inquiry into other potentially high-risk loan products and practices that are not specifically covered by the proposed rule. The Request for Information is focused on:

Comments on the Request for Information are due on Oct. 14, 2016.

The Request for Information will be available at: https://files.consumerfinance.gov/f/documents/RFI_Payday_Loans_Vehicle_Title_Loans_Installment_Loans_Open-End_Credit.pdf

This post was originally published here.