In the aftermath of a letter signed by 500 consumer advocates from all 50 states, an unprecedented push for reining in abusive small-dollar, high-cost loans has engaged the White House and Capitol Hill. When an increasing number of Americans are striving to keep their financial houses in order, eliminating predatory lending is making news.
If advocates prevail, a range of consumer loans, including payday and car title, high-cost installment loans, deposit advance products and open-end lines of credit, will all be affected. The benefit for consumers will be an exit from the turnstiles of debt that rob borrowers’ earnings.
One major development was the announcement of a long-awaited draft proposal from the Consumer Financial Protection Bureau (CFPB). At a public field hearing in Richmond, Va .on March 26, Richard Cordray, CFPB director, explained the significance of proposed regulation.
“Extending credit to people in a way that sets them up to fail and ensnares considerable numbers of them in extended debt traps, is simply not responsible lending,” said Cordray. “It harms rather than helps consumers. It has deserved our close attention, and now it leads to a call for action.”
CFPB’s detailed fact sheet identifies all covered loans.
The Bureau’s proposal endorses a strong ability to repay principle. When lenders assess ability to repay, they would be expected to determine the borrower can repay without defaulting or re-borrowing. Lenders would begin verifying consumer income and major financial obligations as part of determining the ability to cover their basic living expenses and the loan. There would also be heightened protections for any loan made within 60 days of a previous one.
A troubling aspect of the proposal, though, is that it would offer an alternative to determining a consumer’s ability to repay the loan. Lenders could ignore the underwriting requirements if they limit a borrower to no more than six short-term loans or a total of 90 days of indebtedness in a given year. Other alternatives to determining ability-to-repay would apply to longer-term loans.
Consumer advocates maintain that payday lenders have proven to be adept at exploiting loopholes, and as a result, borrowers deserve both prevention and protection measures. Advocates are calling for loopholes to be closed before the rule is finalized.
For two panel members at the hearing, CFPB’s proposals were a cause for encouragement as well as concern.
Wade Henderson, president/CEO of the Leadership Conference on Civil and Human Rights, a coalition of more than 200 human rights organizations, said the ability to obtain and preserve economic security is an essential civil and human right of all Americans. It has also been a nagging concern for its disproportionate impact on communities of color.
“They have gone from experiencing redlining and other forms of overt lending discrimination to, in more recent years, predatory and deceptive mortgage and consumer lending often under the guise of ‘easy access to credit,’ said Henderson “with the most devastating consequences resulting from the abusive mortgage lending practices that led to the 2008 financial crisis and Great Recession.
“At the same time, we are concerned about the impact of any kind of safe harbor provision that could continue to expose some borrowers to prolonged and expensive cycles of debt. We are especially concerned about the impact any loopholes could have in states which already outlaw high-cost payday lending, because they could create an artificially high nationwide ‘floor’ that the industry could exploit to weaken existing state protections.”
Mike Calhoun, president of the Center for Responsible Lending, agreed with Henderson.
“This proposal’s ‘safe harbor’ provision is an invitation to evasion. If adopted in the final rule, it will undermine an ability to repay provision that gives consumers the best hope for the development of a market that offers access to fair and affordable credit,” said Calhoun.
Earlier, the center’s research revealed multiple harms caused by payday and other small-dollar loans: The typical car-title borrower takes eight renewals on a single loan and eventually pays $3,391—over three times the average amount borrowed.
On the same day in Birmingham, Ala., President Obama spoke to a largely student audience at Lawson State Community College about his concerns about payday lending.
“As Americans, we believe there’s nothing wrong with making a profit,” said Obama. “But if you’re making that profit by trapping hard-working Americans in a vicious cycle of debt, then you need to find a new way of doing business.”
While the rulemaking process begins, Senators and Members of the House of Representatives concurrently filed legislation to crack down on predatory lending practices. Championing a 36 percent cap for all consumer credit transactions were Senators Barbara Boxer (Calif.), Dick Durbin (Ill.), and Sheldon Whitehouse (R.I.). On the House side, a companion bill was filed by Representatives Steve Cohen (Tenn.) and Matt Cartwright (Penn).
“It is unconscionable that these companies are preying on Americans who are struggling to make ends meet,” said Sen. Boxer. “This legislation will protect working families by capping the interest rates and fees that lenders can charge consumers.”
With regulation and legislation now pending, consumers can still add their voices and influence to this continuing public debate.
(Charlene Crowell is a communications manager with the Center for Responsible Lending. She can be reached at <Charlene.email@example.com>.)