Protections Aim To Ensure Borrowers Can Pay Off Loans And Don’t Face Unfair Fees
October 5, 2017
WASHINGTON, D.C. – Consumers Union, the policy and mobilization division of Consumer Reports, praised the Consumer Financial Protection Bureau (CFPB) today for adopting new rules to protect consumers from drowning in debt from high cost payday, installment and auto title loans. Under the new rules, lenders will generally be required to make sure borrowers can pay back their loans and will face restrictions on repeatedly debiting accounts without permission or pushing consumers into new loans to pay off old debts.
“Too many Americans end up sinking deep into a quicksand of debt when they take out expensive high cost loans,” said Suzanne Martindale, senior attorney for Consumers Union. “All too often, these loans prove nearly impossible to pay back and borrowers wind up taking out multiple loans or defaulting, making them worse off than when they started borrowing. The CFPB’s new rules will help consumers avoid getting trapped in a cycle of debt by generally requiring sensible underwriting and safeguards to prevent repeat borrowing.”
A CFPB review 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. The CFPB found that many borrowers repeatedly roll over their payday loans or take out additional loans because they are unable to pay off the loan at the end of the two week term. Nearly half of payday loan borrowers have more than 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.
Similarly, consumers who take out auto title loans are often unable to pay them off when they become due and are forced to re-borrow and pay more fees. A CFPB analysis of auto title loans between 2010 and 2013 found that 80 percent of borrowers signed up for another title loan on the same day their previous loan was repaid. More than two-thirds of all auto title loan business comes from borrowers who take out seven or more consecutive loans during the course of a year. One in every five borrowers eventually loses their car due to repossession.