The Consumer Financial Protection Bureau (CFPB) announced today that it is considering proposing rules that would end payday loan debt traps by requiring lenders to take steps to make sure that consumers can repay their loans.
The proposals under consideration would also restrict lenders from attempting to collect payment from consumers' bank accounts in ways that tend to rack up excessive fees.
The strong consumer protections being considered would apply to payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans.
"Today we are taking an important step toward ending the debt traps that plague millions of consumers across the country," said CFPB Director Richard Cordray. "Too many short-term and longer-term loans are made based on a lender's ability to collect and not on a borrower's ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them."
The Bureau released an outline of the proposals under consideration in preparation for convening a Small Business Review Panel to gather feedback from small lenders, which is the next step in the rulemaking process.
The proposals under consideration cover both short-term and longer-term credit products that are often marketed heavily to financially vulnerable consumers.
The Bureau says that it recognizes consumers' need for affordable credit but is concerned that the practices often associated with these products – such as failure to underwrite for affordable payments, repeatedly rolling over or refinancing loans, holding a security interest in a vehicle as collateral, accessing the consumer's account for repayment, and performing costly withdrawal attempts – can trap consumers in debt. The Bureau says that these debt traps also can leave consumers vulnerable to deposit account fees and closures, vehicle repossession, and other financial difficulties.
According to a CFPB press release, the proposals under consideration provide two different approaches to eliminating debt traps – prevention and protection.
Under the prevention requirements, lenders would have to determine at the outset of each loan that the consumer is not taking on unaffordable debt. Under the protection requirements, lenders would have to comply with various restrictions designed to ensure that consumers can affordably repay their debt. Lenders could choose which set of requirements to follow.
A factsheet summarizing the proposals under consideration is available at:http://files.consumerfinance.gov/f/201503_cfpb-proposal-under-consideration.pdf
This is the first public step in the CFPB's efforts to reform the markets for these products. In addition to consulting with the Small Business Review Panel, the Bureau will continue to seek input from a wide range of stakeholders before continuing with the process of a rulemaking. Once the Bureau issues its proposed regulations, the public will be invited to submit written comments which will be carefully considered before final regulations are issued.