The Consumer Financial Protection Bureau, at a field hearing yesterday in Richmond, Virginia, explained how to deal with one of the nation’s most abusive industries: predatory consumer credit.
The transformation is still in its early stages. CFPB described it as the announcement of a review of a proposal for payday, installment and auto title loans. If the agency finishes its job – and if they are successful, which is an open question at this point – lenders may no longer be able to trap consumers in a cycle of debt. But we should ask ourselves why so many Americans have to resort to 21st The usurpation of the century loan.
There are more payday loan points than McDonald’s and Starbucks combined, and over 12 million Americans use their services every year. This relatively new form of consumer credit can be described as a debt tornado. Borrowers take out a loan without asking questions and give the lender either a post-dated check, electronic access to their bank account, or the right to take their vehicle (in an auto title loan) for collection. At this point, it doesn’t matter whether the borrower repays the loan or not, as long as the lender can keep them in debt and extract the charges.
Lenders typically charge between $ 10 and $ 20 in fees per $ 100 borrowed for each two-week pay period. If the borrower cannot repay the loan, the lender renews it, thereby generating more income. CFPB 2013 study on payday loans found that more than two-thirds of borrowers had taken out seven or more loans per year. In most cases, new loans are made on the same day the previous loans were closed. The average borrower remains in debt 200 days a year.
Immediate access to bank accounts ensures that lenders get their investment back, even if it totally drains borrower funds and incurs overdraft fees. The auto title loan is even worse: borrowers put a car they own without debt as collateral, at the risk of losing their only means of transport.
By the time most borrowers escape the tornado, they will have paid more in fees than the original loan balance, not to mention damage to their credit rating or loss of their car. This has allowed payday lenders, often capitalized by Wall Street banks, to become huge publicly traded companies with huge profits.
Under the Dodd-Frank Act of 2010, the CFPB will oversee this industry at the federal level for the first time, although the law does not allow it to cap interest rates. After three years of study, the office issued a set of proposals yesterday and invited comments.
The proposals fall into two distinct categories: prevention and protection. Prevention incorporates the new idea of requiring the lender to ensure, through third party financial records, that the borrower can actually repay the loan without default or re-borrowing. Since the payday lender’s best client is someone who lacks the ability to repay – a borrower who must continually renew loans and accumulate fees – this proposal would attack the current business model. But CFPB has added an alternative protection method with no repayment capacity requirement. “Lenders could choose which set of requirements to follow,” CFPB director Richard Cordray said in Richmond.
For short-term loans of less than 45 days, lenders would be allowed to offer an initial loan and two rollovers, followed by a 60-day cooling off period. They should provide an affordable way out of debt, either through a decrease in principal or an interest-free “exit ramp” to complete payments. For loans over 45 days, CFPB is considering two protection approaches. One would limit lenders to the same consumer loan terms as the National Credit Union Association. The other would limit monthly payments to less than 5% of the borrower’s income.
There are other ideas in the proposal, including requiring borrowers to be notified before their bank accounts are raided and placing a limit on unsuccessful withdrawal attempts that result in bank account fees. But the hybrid prevention / protection approach concerns almost all consumer advocates. Michael Calhoun of the Center for Responsible Lending explained on a conference call that the protection rules would allow payday lenders to grant borrowers six short-term, low-value loans per year, creating enough fees in some states to that the borrower owes $ 1,250 on an initial loan of $ 500. “It’s a better place to be safe than trying to fix what’s already broken,” Calhoun said.
The CFPB has had no problem imposing a repayment capacity standard for mortgages, and these consumer groups want it to do the same for low-value consumer loans. The protective alternative would not prohibit lump sum payments at the end of a loan, which “devastates borrowers,” said Nick Bourke, whose organization, the Pew Charitable Trusts, released a full report auto title lending report this week. “The CFPB should require that all loans have affordable payments. “
On a conference call, White House press secretary Josh Earnest evaded whether President Obama supported a full capacity to pay requirement. “We would see the rules as a foundation upon which states could build,” Earnest said. But at the state level, lenders are often one step ahead of regulators. For example, in Ohio, although the legislature banned payday lending and voters backed it in a ballot by a 2-1 margin, lenders returned to state by re-qualifying as mortgage lenders. It is essential to bring increased resources and enforcement capacity to the federal level, but the gaps that advocates have involved would detract from this.
While regulation in the low dollar credit Wild West is urgently needed, we also need to reflect on the root causes that explain why so many Americans are in perpetual need of a few hundred dollars more. The vast majority of payday loan and auto title consumers use the money for daily expenses, not emergencies. This rolling desperation pushes them towards predatory financiers. That much of this activity is happening in communities of color should only redouble our efforts to put it out. No one who works full time really should have to deal with high cost predatory loans just to pay all the bills. An increase in wages would accelerate their uselessness, as would a stronger safety net of transfer programs to fill in the gaps.
If that doesn’t work, there is always competition. “We need viable options and alternatives for our communities,” said Wade Henderson, president and CEO of The Leadership Conference on Civil and Human Rights. Some options are Already availablesuch as loans from credit unions or cash advances on credit cards, both of which are much cheaper than payday loans.
But Henderson pointed out a proposal from the Inspector General of Postal Services of the United States, for the Post to offer fully underwritten and lower cost small dollar loans. If the public has an interest in eliminating predatory lending and giving people a fairer chance, then there is good reason to support a public option, which simultaneously benefits the Postal Service and low-income Americans, in addition to the regulations.
Essentially, the payday loan predators are fulfilling a role the government should play, and they have no interest – financial or moral – in being nice about it. If full-time workers need extra help, it’s not just a problem for regulators, it’s a problem for all of us.
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