After five years of field hearings, town hall meetings, multiple research reports, and over one million comments, the Consumer Financial Protection Bureau (CFPB) announced on Oct. 5 a new rule to rein in predatory payday and car-title loans.
“These protections bring needed reform to a market where far too often lenders have succeeded in setting up borrowers to fail. . . Faced with unaffordable payments, consumers must choose between defaulting, re-borrowing, or failing to pay basic living expenses or other major financial obligations,” said Richard Cordray, CFPB Director.
Central to the CFPB’s rule is the establishment of an ability-to-repay principle. High-cost loans of 45 days or less, as well as longer term loans that end in a balloon payment, must first take into account whether the loan is affordable when both borrower income and expenses are considered. These loans allow lenders to seize funds from either a borrowers’ bank accounts (payday loans) or repossess vehicles that were used as collateral (car-title loans).
Although marketed by predatory lenders as an easy lifeline in a financial emergency, research by CFPB, and other consumer groups found otherwise: payday lending’s business model is the tool that drowns borrowers into a sea of debt. With triple-digit interest rates of 400 percent or higher, payday and car-title loans drain $8 billion in fees on loans averaging $300-$400. Borrowers stuck in more than 10 loans a year generated 75 percent of all payday loan fees. Similarly, 85 percent of car-title loan renewals occur 30 days after a previous one could not be fully repaid.