Today, the Consumer Financial Protection Bureau (CFPB) held a field hearing to share their recommendations for stopping the predatory lending debt trap. The recommendations could create strong consumer protections for payday loans, vehicle title loans, deposit advance products and certain high-cost installment and open-end loans.
Idaho Community Action Network, which has actively lobbied for policy restrictions on the industry like a cap on interest rates, believes this proposal is a significant step in the right direction and will directly benefit Idaho communities. The emergence of national solutions that address the debt trap and wealth stripping plaguing our families and communities across the nation is a significant development in the movement for consumer protection.
This proposal takes a major step toward protecting families and their hard-earned money. For Idaho, these national solutions can alleviate the struggle for families who, frankly, have enough to deal with in a state with low wages and restrictive access to health care. Considering that each year around $64 million is being stripped from Idaho’s local economies, families don’t have more to give. It’s like squeezing blood from a turnip.
With more storefronts than Starbucks, the small dollar loan industry has shown blatant disregard for common sense practices, including basic affordability underwriting. Payday lenders need to follow the same standards as all other lenders and our government has a responsibility to ensure that every day Americans have access to good credit.
The CFPB proposal considers two basic options for ending the debt trap associated with short term predatory lending: prevention and protection. The prevention model would require underwriting to verify income and expenses and make sure there is enough money to repay the loan, verification of no other outstanding loans, and a cooling off period of 60 days between additional lending. This model could eliminate debt traps by making sure the consumer is not taking on unaffordable debt.
With the protection model lenders would have to adhere with various regulations designed to ensure that consumers can affordably repay their debt. These regulations include loan amount limits, limits on finance charges, verification of no other outstanding loans, limited rollovers, along with a 60 day cooling off period.
In addition, similar regulations are proposed for longer term loans including installment loans. Again, two models are considered that follow the protection/prevention formula for stopping the debt traps and include regulations similar to the short term loan models. With both models there are tighter regulations on additional lending.
Finally, the CFPB recommendations, call for an end to harmful collection practices for repayment. These include notification before accessing deposit accounts and limiting the number of unsuccessful withdrawal attempts. These will protect the borrower from further harm against additional bank charges including spiraling insufficient funds fees and even account closures.
While this seems like real protection against predatory lending, the proposal also has some dangerous loopholes that serve no real purpose and could keep the payday loan trap alive. The proposal gives predatory lenders the option of underwriting short-term loans. However, affordability should never be an option.
A good loan is one the lenders can reasonably expect that a borrower will pay back, on time, and still be able to pay for necessities like rent, heat, groceries and transportation to get to work. Lenders must ensure loans are affordable and can be repaid — period — no matter the length of the loan, not just after a certain number are made and not in exchange for limits on roll-overs.
Strong protections, without any loopholes, to regulate this industry will not be easy. After all, these are the same people who managed to circumvent the Department of Defense’s efforts to cap loan rates to members of the military by, for example, making loans for three months and a day to get around rules governing three-month loans.
Payday, car title and installment loans without the full array of protections are toxic. We don’t require restaurants to only serve safe food after the first three meals, or decide if they want to serve safe food. Likewise, it’s absurd and dangerous to suggest that any number of payday loans could be safe for consumers without the protections the CFPB has already identified.
We appreciate the time and hard work the CFPB has put into these recommendations, and we are even more appreciative to have the CFPB working to protect hard working families across the nation from greedy corporations and their wealth stripping practices. With some fine tuning to close any possible loopholes, these recommendations can end the debt trap created by predatory lending.