CHN: Rule Proposed to Curtail Payday Loan Debt Trap

On June 2, the Consumer Financial Protection Bureau (CFPB) released a new proposed rule to address payday, car title, and certain high-cost installment loans. These loans, which target low-wage workers and communities of color, too often trap low-income Americans in a cycle of debt and dramatically increase the likelihood of bankruptcy and delinquency on other bills. Payday and car title loans, on average, carry interest rates of more than 300 percent. According to the CFPB, the proposed rule would require lenders to determine whether borrowers can afford to pay back their loans, based on income and expenses, before making the loan, known as the ability-to-repay requirement.

While advocates applaud the move by the CFPB to rein in payday and car title loans, many caution that the proposed rule does not go far enough and contains loopholes pushed for by payday lenders. According to the Stop the Payday Loan Debt Trap Coalition (of which CHN is a member), the proposal exempts six high-cost payday loans from the ability-to-repay requirement, and its protections against flipping of short-term loans are weak. They note that the proposal doesn’t go far enough to ensure that, after repaying the loan, the borrower will have enough money left to cover basic living expenses without reborrowing. In addition, the proposal requires only that the lender not have default rates above those of other payday lenders. The Stop the Debt Trap Coalition is encouraging advocates to submit comments to the CFPB before September 14, urging the agency to close these loopholes to protect low-income Americans.

The CFPB is expected to consider the comments and issue a final rule in 2017. For more information, visit Americans for Financial Reform, and see this post on CHN’s blog.

consumer protection
payday lending