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CFPB Proposes Rule to End Payday Debt Traps
Friday, June 3, 2016 6:40 AM

Rule Would Require Lenders to Determine Whether Consumers Have the Ability to Repay Payday, Auto Title, and Certain Other High-Cost Loans

The Consumer Financial Protection Bureau on Thursday proposed a rule aimed at ending payday debt traps by requiring lenders to take steps to make sure consumers have the ability to repay their loans. The proposed rule would also cut off repeated debit attempts that rack up fees. These strong proposed protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment and open-end loans. The CFPB is also launching an inquiry into other products and practices that may harm consumers facing cash shortfalls. 

The proposed rule would apply to certain short-term and longer-term credit products that are aimed at financially vulnerable consumers. The Bureau has serious concerns that risky lender practices in the payday, auto title, and payday installment markets are pushing borrowers into debt traps. Chief among these concerns is that consumers are being set up to fail with loan payments that they are unable to repay. Faced with unaffordable payments, consumers must choose between defaulting, reborrowing, or skipping other financial obligations like rent or basic living expenses like food and medical care.

The CFPB is concerned that these practices also lead to collateral damage in other aspects of consumers’ lives such as steep penalty fees, bank account closures, and vehicle seizures. Loans covered by the proposal include:

  • Payday and other short-term credit products.
  • High-cost installment loans.

Proposal to End Debt Traps

The CFPB is proposing a rule that would put an end to the risky practices in these markets that trap consumers in debt they cannot afford. The proposed ability-to-repay protections include a “full-payment” test that would require lenders to determine upfront that consumers can afford to repay their loans without reborrowing.

The proposal includes a “principal payoff option” for certain short-term loans and two less risky longer-term lending options so that borrowers who may not meet the full-payment test can access credit without getting trapped in debt. Lenders would be required to use credit reporting systems to report and obtain information on certain loans covered by the proposal. The proposal would also limit repeated debit attempts that can rack up more fees and may make it harder for consumers to get out of debt.

Specifically, the proposal includes the following protections: 

  • Full-payment test. 
  • Principal payoff option for certain short-term loans.
  • Less risky longer-term lending options.
  • Debit attempt cutoff.

This proposed rulemaking is the latest step in the CFPB’s efforts to reform the markets for these payday and installment loan products. The Bureau already exerts supervisory oversight of payday lenders and takes enforcement actions as appropriate to address violations of the law. With its action today, the Bureau continues to seek input from a wide range of stakeholders by inviting the public to submit written comments on the proposed rule once it is published in the Federal Register. Comments on the proposal are due on Sept. 14, 2016 and will be weighed carefully before final regulations are issued.

Download a factsheet summarizing the proposed rule.

Review the CFPB’s proposal.

Inquiry into Emerging Risks

The CFPB is also launching an inquiry into other potentially high-risk loan products and practices that are not specifically covered by the proposed rule. The Request for Information is focused on:

  • Concerns about risky products not covered: The Bureau is seeking information about forms of non-covered loans such as high-cost, longer-duration installment loans and open-end lines of credit where the lender does not take a vehicle title as collateral or gain account access.
     
  • Concerns about risky practices not covered: The Bureau seeks to learn more about practices that can impact borrowers’ ability to pay back their debt. This includes methods lenders may use to seize borrowers’ wages, funds, vehicles, or other forms of personal property in a way that could pose consumer protection concerns. 

Comments on the Request for Information are due on Oct. 14, 2016.

Read the full press release here.