For more than a decade, civil rights organizations, labor, clergy, and consumer advocates have fought to end triple-digit interest rates on small dollar loans. Whether it was a high-cost installment, payday or car-title loan, the push has been to free America’s working families and consumers of color from fees that can double, or even triple the amount of money borrowed.
Now, after years of research, public hearings and advisory forums, on June 2 the Consumer Financial Protection Bureau (CFPB) announced a long-awaited proposed rule. Speaking before a public hearing in Kansas City, Richard Cordray, CFPB’s director, spoke to the ultimate consumer goal tied to the proposed rule.
“Our proposed rule is designed to ensure more fairness with these financial products by making systemic changes to steer borrowers away from ruinous debt traps and restore to them a larger measure of control over their affairs,” said Director Cordray. “Ultimately, our objective is to allow for responsible lending, while making sure that consumers do not fall into situations that undermine their financial lives.”
For Rev. Dr. Cassandra Gould, a hearing speaker, pastor of Quinn Chapel AME Church in Jefferson City, Missouri, and executive director of Missouri Faith Voices, “all financial products are not equal” and payday lending is “a scourge on minority communities.”
“Families need credit but not all products help despite filling that need,” testified Rev. Gould. “I am reminded of the people in Flint. They needed water because we need it to survive, but the water they received was deadly. Payday lending is toxic; it equates to the water in Flint, it does more harm than good.”
“Instead of finding ways to help people in desperate economic times, predatory lenders trap them with systematic callousness and cycles of debt for their own gain,” added Rev. Gould.
The centerpiece of the CFPB’s proposal establishes an ability-to-repay principle based on income and expenses, covering both short-term and long-term loans – but with exceptions.
Early reactions to the proposal were as swift as they were strong.
“Low-income people and people of color have long been targeted by slick advertising and aggressive marketing campaigns to trap consumers into outrageously high interest loans,” said Wade Henderson, president and CEO of The Leadership Conference on Civil and Human Rights. “That’s why the civil rights community wants to see predatory payday lenders reined in and regulated. The power to lend is the power to destroy.”
Recent research by the Center for Responsible Lending (CRL) found that payday loans drain $4.1 billion in annual fees from consumers living in one of 36 states where the loans are legal.
Similarly, car title loans offered in 23 states account for another $3.9 billion in fees each year according to CRL. For these borrowers, car repossession, not repayment, is a common result that ends mobility for working families. Depending upon available alternative transportation options that can jeopardize employment.
Nearly half of these combined fees – $3.95 billion – come from only five states: California, Illinois, Mississippi, Ohio and Texas. Each of these states loses a half-billion or more in fees each year.
“These loans often come with outrageous terms, such as interest rates that can top 1,000 percent, and trap millions of Americans a year in a cycle of debt that many of them are never able to exit,” said Congresswoman Maxine Waters. “I applaud the CFPB for their proposal and I will continue to work with the CFPB and consumer advocates to stop the debt trap once and for all.”
Similar reactions came from Latino leaders. “Payday loans might sound like a good option, but they are intentionally structured to keep borrowers in a cycle of borrowing and debt that causes millions of hardworking Americans extreme financial difficulty,” said Janet Murguía, National Council of La Raza President and CEO.
For Illinois Congressman Luis Gutierrez, tying the ability-to-pay standard to payday lending is long overdue. “These lenders are taking a big bite out of low- and medium-income borrowers, exploiting their lack of choices and shaking down hard-working men and women,” said Gutierrez. “I have tried to address this through legislation, but I was always up against a very powerful and well-funded lobby and they work on politicians at the state and federal level in both parties.”
Many advocates, including the Stop the Debt Trap Campaign, viewed the measure as an important first step that still needs work. This broad coalition of more than 500 advocacy organizations from all 50 states spans civil rights, clergy, labor, consumer issues, and other groups is among the largest groups advocating for consumers.
This coalition applauded the removal of a large loophole in last year’s preliminary proposal. It would have permitted lenders to avoid an ability-to-repay test by limiting loan payments to 5 percent of a borrower’s gross income. CFPB rejected that approach in part because evidence does not support that such loans would in fact be affordable for many lower-income borrowers.
According to Mike Calhoun, president of the Center for Responsible Lending (CRL), “As currently written, the rule contains significant loopholes that leave borrowers at risk, including exceptions for certain loans from the ability-to-repay requirement, and inadequate protections against ‘loan flipping’ – putting borrowers into one unaffordable rule after another.
For CRL, the final rule should:
- Apply ability-to-repay requirements to every loan;
- Increase protections against loan flipping;
- Ensure lenders must determine that borrowers have enough income left over to meet their basic living expenses; and
- Be broadened to cover any loan that enables lenders to coerce repayment from borrowers.
Often consumers have opinions but wonder if anyone is listening. The proposed payday lending rule is a time when CFPB not only is listening, but is relying on consumers and organizations to weigh in by September 14. All interested groups or individuals can learn how to have their concerns count by visiting CFPB’s web.