In his article for The Pew Charitable Trusts, “The CFPB’s Proposed Payday Loan Regulations Would Leave Consumers Vulnerable,” author Nick Bourke maintains that while the Consumer Financial Protection Bureau’s proposed rule to regulate small-dollar loans provides certain consumer protections, the proposal falls short. In particular, Bourke’s Sept. 7, 2016, article asserts that the CFPB’s draft rule focuses on “the process of issuing a loan rather than on establishing product safety standards.” Moreover, the rule would “discourage banks and credit unions from entering this market and offering lower-cost alternatives,” he contends.
Bourke, the Director of The Pew Charitable Trusts, indicates that the CFPB’s proposal would “accelerate the shift toward installment lending that is already under way in this market.”
Findings, critique. On one hand, the CFPB’s rule would strongly encourage payday and auto title lenders “to give borrowers more time to repay loans in smaller installments, rather than large lump-sum payments,” Bourke points out. On the other hand, the proposal “fails to provide standards for affordable payments or reasonable loan lengths that are sufficiently clear to ensure the safety of this credit for consumers,” he states.
Bourke emphasizes that, under the CFPB’s current proposal:
- the skewed focus on underwriting fails to fully address the harm to consumers of high-cost installment lending because, among other things, “unlike mainstream creditors, payday and auto title lenders have access to borrowers’ checking accounts and car titles to improve their ability to collect” on the loans;
- this power by creditors over “financially fragile consumers” makes the high-cost, small-dollar loans “inherently dangerous;” and
- while the rule’s “conditional exemptions” would allow lenders to use their own methods for evaluating a borrower’s ability to repay a loan, the permitted alternatives are “unlikely to make better credit widely available.”
Recommendations. Based on these findings, the Pew article recommends that the CFPB “take firmer steps” to prevent small-dollar loans from “becoming dangerous or abusive” by:
- limiting the time period in which lenders can retain access to a borrower’s checking account;
- subjecting lenders with high default rates to “greater levels of scrutiny;”
- setting “clear product safety standards”—including a “5 percent payment option;” and
- enabling banks and credit unions to provide “safer, lower-cost small-dollar credit.”
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