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CFPB’s revised payday loan rule eliminates important protections for borrowers

Proposed rule removes “ability-to-repay” requirement needed to ensure borrowers can afford loans

WASHINGTON, D.C. – A revised payday loan rule proposed by the Consumer Financial Protection Bureau (CFPB) today eliminates important protections adopted previously by the Bureau that were designed to ensure borrowers have the ability to pay off their debts without reborrowing, according to Consumer Reports.  If adopted, the proposal would gut safeguards issued in 2017 that have not yet gone into effect.

“The CFPB’s latest proposal will leave struggling borrowers vulnerable to falling further behind by giving payday and other high-cost lenders the green light to continue trapping them deep in debt,” said Suzanne Martindale, senior policy counsel for Consumer Reports.  “In light of this proposal, it’s more important than ever for states to take action to protect consumers from predatory payday and auto title loan practices.”

Martindale continued, “The CFPB spent five years conducting market research, soliciting stakeholder input, and analyzing more than one million public comments to create the 2017 rule.  This proposal ignores all of that work and guts the sensible underwriting safeguards needed to ensure borrowers stand a reasonable chance of paying off their debts.”

Under the CFPB’s original rule issued in 2017, lenders making short-term loans would be subject to a “full payment test” and required to determine upfront that borrowers can pay back the amount they owe without immediately re-borrowing.  Lenders could forego this underwriting evaluation if they offered a “principal-payoff option,” which enables the borrower to pay off their debt more gradually.  However, this rule was abandoned under the leadership of Acting Director Mulvaney.  The CFPB’s revised proposal issued today completely eliminates the “ability to repay” underwriting requirement for lenders.

“The ability to repay requirement is essential to protect vulnerable borrowers from unscrupulous lenders who offer loans that too often lead to insurmountable debt,” said Pamela Banks, senior policy counsel for Consumer reports.  “We urge Director Kraninger to maintain the reasonable underwriting standards in the payday lending rule that are needed to ensure borrowers can pay off their loans while meeting other basic living expenses.”

Study after study has shown that most borrowers with payday loans are forced to renew them again and again when payment is due.  Borrowers who take out auto title loans likewise frequently run into trouble, and often lose their cars when they can’t repay their debts.

A CFPB study of the payday lending market issued in 2017 found that a typical payday loan of $350 carried a median fee of $15 per $100 borrowed and would come due after two weeks, which translates into a 391 percent APR.  Once a person takes out that first high-cost loan, odds are high they’ll come up short and end up with more loans.  According to that CFPB study, the median payday loan borrower has 10 transactions a year (14 percent had 20 or more transactions a year).  Most borrowers who take out a new payday loan do so on the same day the old loan is closed or soon thereafter.  The CFPB also found that one in five borrowers with auto title loans eventually loses their car to repossession.

Contact:  Michael McCauley, mmccauley@onsumer.org, 415-431-6747, ext. 7606