CHICAGO, IL – March 27, 2015 – (RealEstateRama) — The Consumer Financial Protection Bureau (CFPB) released yesterday a working draft of a proposal to rein in abusive consumer lending schemes such as payday, auto title, and installment lending. The draft, presented at a field hearing in Richmond, VA, would require lenders to verify before making a loan that borrowers can pay it back in full and on time, without re-borrowing, and still cover their basic necessities such as rent, food, and utilities. The draft proposal importantly recognizes that making loans without verifying whether borrowers can afford to repay them is reckless and predatory.
Unfortunately, the draft also contains a loophole that would allow lenders to avoid verifying borrowers’ ability to repay their loans. In order to circumvent this requirement, lenders just need to adhere to relatively non-restrictive standards that still allow for abusive practices. For example, under this rule short-term lenders could make up to six unaffordable loans to the same borrower per year.
Woodstock Institute is part of the Monsignor John Egan Campaign for Payday Loan reform and the Stop the Debt Trap Campaign, which are fighting for an end to abusive lending. In Illinois, short-term payday loans carry a 391 percent annual percentage rate (APR), installment loans carry a 99 percent APR, and car title loans are largely unregulated. Dory Rand, President of Woodstock Institute, made the following statement on the proposal:
The proposal unveiled by the Consumer Financial Protection Bureau takes an important step toward ending the abusive features and practices for a wide range of predatory lending products but also includes a gaping loophole that, in essence, puts a government stamp of approval on unaffordable back-to-back loans. We urge the CFPB and Director Cordray to reconsider and leave this loophole out of the rule.
The proposed affordability criteria require payday lenders to adopt sensible standards already used by responsible lenders: borrowers must be able to repay their loans and still afford their other basic expenses.
In Illinois, we fought for a decade to end the worst abuses of the payday and installment industries. Due to aggressive lobbying from payday and installment lenders, lenders in Illinois do not have to assess borrowers’ other financial obligations and payments can be as high as a quarter of the borrower’s monthly income. The CFPB’s draft affordability standards improve upon Illinois’ law by requiring lenders to verify whether borrowers can repay their loans and still afford housing costs, other debt payments, and basic living expenses. If adopted, these standards would strengthen access to good credit for consumers who need it and give responsible lenders a fighting chance to compete, thrive and profit in a fair environment.
We urge the CFPB not to give payday lenders a way to circumvent the common-sense principle that borrowers should always be able to reasonably expect to afford their loans. Our experience in Illinois demonstrates that lenders will exploit any loophole available to them in order to keep borrowers stuck in the debt trap. When we passed laws in 2005 with protections for loans with terms of 120 days or less, lenders quickly switched to offering loans with terms of 121 days in order to continue their abusive practices. It took another five years of whack-a-mole to close the loophole and extend protections to longer-term loans.
The only effective way to stop debt trap lending, keep hard-working consumers from being lured into financial quicksand, and grow a strong, responsible small consumer loan market is to enact consistent, airtight standards that require all loans to be affordable.
A broad range of consumer advocates from Illinois traveled to Washington, D.C. this week to urge their elected officials to support a strong rule from the CFPB that ensures that all small consumer loans will be affordable. We also thanked our Senator, Dick Durbin, for introducing a proposal that would accomplish what the CFPB’s rule cannot: establishing a 36 percent rate cap for small consumer loans that would end usury, once and for all.
More information from Woodstock Institute:
Illinois Payday and Installment Loan Reforms (Presentation)