The Consumer Financial Protection Bureau (CFPB) issued an outline of its proposed rule on payday lending that would require lenders to take steps to make sure consumers can repay their loans and restrict collectors from trying to collect payment from consumers’ bank accounts in ways that result in the accumulation of fees.
“The proposals under consideration cover both short-term and longer-term credit products that are often marketed heavily to financially vulnerable consumers,” the CFPB stated.
In his opening remarks at the March 26 field hearing in Richmond, Va., CFPB Director Richard Cordray stated that the CFPB is proposing to issue rules that will address consumers’ ability to repay, prevent rollovers – such as repeated attempts to access fees which normally result in multiple overdraft fees – and incorporate a cooling-off period for loans.
“If a consumer returns for an additional short-term loan before the consumer has had time to regain her financial footing, lenders would have to confirm that some change in circumstances has occurred that would make the new loan affordable even though the consumer has been unable to escape the debt. In cases where the consumer takes out three loans in close succession, there would be a mandatory 60-day cooling-off period after the third loan to give the consumer enough time to recuperate financially before borrowing again. This would prevent lenders from taking advantage of consumers caught in a financial rut by prohibiting long sequences of loans that trap consumers in debt,” Cordray said.
The proposals will be first discussed by a Small Business Review Panel, which then will have 60 days to issue recommendations to the CFPB. Once the CFPB considers that feedback, then it can issue a proposed rule, subject to notice and comment.
Here are the rules, costs of CFPB’s payday plans
The proposals the CFPB is considering would cover loans of less than 45 days and loans longer than 45 days in which the lender collects payments through a deposit account or paycheck – or is secured by a vehicle title – and the annual percentage rate is more than 36 percent. Michael Calhoun, president of the Center for Responsible Lending, applauded the CFPB’s research and work in payday lending and stated that the CFPB should make its ability-to-repay requirement a cornerstone of the CFPB’s proposal, adding that such requirements are commonplace and present in all regular cost lending. Calhoun also added that the rules would provide a layer of protections for all states, not just Virginia.
“Individual states play an equally critical role in protecting against abusive consumer lending,” Calhoun said.
Lisa McGreevy, president and CEO of the Online Lenders Alliance, suggested three principles for the CFPB to consider with its rulemaking. The first principle she suggested was that any rule allow for innovation and changes in technology, ensuring that consumers will be able to access credit from the convenience and safety of their homes. She added that the rule must preserve consumer convenience.
Lastly, McGreevy added that she thought that the requirements for determining a consumer’s ability to repay should be consistent with Internet technology.
“Standards should not be rigid or overly prescriptive,” she said.
Stan Leicester, vice president and chief financial officer of Bayport Federal Credit Union, stated that his credit union had started offering payday lending based on what his business saw within the market place.
“We wanted to provide a cheap alternative. With credit unions in general there are two primary objectives: to get the member out of the payday lending cycle from week to week and improve credit scores,” Leicester said. “As a financial institution, we report their credit to the credit bureau and it is an excellent opportunity for them to pay that loan off and improve their scores. Specifically, we offer a line of credit that is good for a year. There is a small fee. There is an interest rate on it. We require them to take the amount and pay it off within 30 days.”
Edward D'Alessio, executive director of Financial Service Centers of America, argued that consumers would lose credit options currently available without any real benefit from the rules, adding that labeling products as debt traps was a criticism of consumers.
“It says they are not sufficiently intelligent – intelligent to avoid pitfalls. Our customers are intelligent and responsible and make difficult but rational financial decisions every single day based on their own judgment of what is right for them,” D’Alessio said.
Hearing attendees heard from a variety of consumers, many whom recommended to others to never take out a payday loan, as others that argued that it was helpful in a time of need. It also was argued that the consumers who took out payday loans usually did so because they had had nowhere else to receive credit.
When asked about how to address the right balance of consumer protection with the need of providing access to financial products such as payday loans, D. Lynn DeVault from Check into Cash said, “We know it when we see it.
“Our products are simple. The disclosure is clear and transparent. Our consumers understand what they are borrowing and when it is due. Frequently we are their only alternative. We are their lifeline – the place that they turn when other options are not there. To ensure the proper balance between access and protection we do have to have clear and consistent guidelines. We support that,” DeVault added.
Wade Henderson, president and CEO of the Leadership Conference on Civil and Human Rights, countered that some of the payday lending taking place is similar to “giving a starving man food laced with poison.”
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