By Lisa M. Goolik, J.D.
The Consumer Financial Protection Bureau unveiled its plan to target the “debt traps” caused by payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans. The bureau’s proposals would require lenders to make certain that consumers can repay their loans while also restricting lenders from attempting to collect payment from consumers’ bank accounts in ways that tend to rack up excessive fees.
“With payday loans, vehicle title loans, and many types of installment loans, the pattern is all too common,” CFPB Director Richard Cordray commented. “A consumer facing difficult financial circumstances is offered quick cash with no questions asked and in return agrees to provide access to a checking account or paycheck or vehicle title in order to get the loan. No attempt is made to determine whether the consumer will be able to afford the ensuing payments,” Cordray said.
Overview. The proposals cover both short-term and longer-term credit products that are often marketed heavily to financially vulnerable consumers. The bureau found that the abbreviated time-frame of short-term loans can make it difficult for consumer to accumulate enough funds to pay off the principal and fees before the due date. For longer-term loans, many consumers struggle to keep up with unaffordable payments, which can result in defaults, costly refinancing, or falling behind on other bills.
For both short-term and longer-term loans, the proposals provide lenders with two options. Lenders would be required to adhere to debt trap prevention requirements or debt trap protection requirements.
Short-term loans. The proposals would cover short-term credit products that require consumers to pay back the loan in full within 45 days, which typically includes many payday loans, deposit advance products, certain open-end lines of credit, and some vehicle title loans.
Debt trap prevention requirements would require lenders to determine at the outset that the consumer can repay the loan when due— including interest, principal, and fees for add-on products— without defaulting or re-borrowing. For each loan, lenders would have to determine whether the borrower would have enough money left to repay the loan after covering other major financial obligations and living expenses. The proposals also include a 60-day cooling off period between loans, additional requirements for offering a second or third loan within the two-month window, and after three loans in a row, all lenders would be prohibited from making a new short-term loan to the borrower for 60 days.
Debt trap protection requirements for short-term loans would limit the number of loans that a borrower can take out in a row and require lenders to provide affordable repayment options. The proposals also cap short-term loans at $500 and provide that they cannot last longer than 45 days, carry more than one finance charge, or require the consumer’s vehicle as collateral.
Longer-term loans. The proposals would also apply to high-cost, longer-term credit products of more than 45 days where the lender has access to repayment from the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and the all-in annual percentage rate is more than 36 percent. This includes longer-term vehicle title loans, some high-cost installment loans, and similar open-end products.
Similar to the short-term loan requirements, the debt trap prevention provisions for long-term loans would require lenders to determine at the outset that the consumer can make each payment on the loan when due—including interest, principal, and fees for any add-on product— without defaulting or re-borrowing. In addition:
- lenders would be required to determine if a consumer is able to repay the loan each time the borrower seeks to refinance or re-borrow; and
- if the borrower has been delinquent on a payment, the lender would be prohibited from refinancing into another loan with similar terms without documentation that the consumer’s financial circumstances had improved enough to be able to repay the loan.
- the loan principal would have to be between $200 and $1,000, and the balance would decrease over the loan term;
- the lender could not charge an interest rate higher than 28 percent and an application fee higher than $20;
- the borrower could have no other covered loans;
- the lender would be able to provide only two of these loans to a borrower within six months; and
- the borrower is limited to one loan at a time.
Under the second approach, lenders could make a longer-term loan provided that the borrower’s monthly payment is no more than 5 percent of the borrower’s gross monthly income. The bureau would also require that the borrower has no other covered loans and the lender cannot provide more than two of these loans to a borrower in a 12-month period.
Payment collection practices. The bureau is also considering proposals, for both short-term and longer-term loans, that would restrict harmful payment collection practices that lead to insufficient funds and returned payment fees. The proposals would require borrower notification before accessing deposit accounts and limit unsuccessful withdrawal attempts to two consecutive attempts.
Small lender input. The bureau is planning to convene a Small Business Review Panel to gather feedback from small lenders, which is the next step in the rulemaking process. The bureau provided a fact sheet that summarizes the Small Business Review Panel process. In addition, the CFPB issued a list of questions for input on potential rulemaking. While the panel meetings are not public, the bureau said it intends to publish meeting materials on its website.
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