New Orleans Well, now we’re talking! The Consumer Finance Protection Bureau (CFPB), what a name, is stepping up big time with new rules to rein in predatory practices of payday lenders. Just because they have storefronts dotting ubiquitously in lower income neighborhoods does not mean they are small fry. This is over a $46 billion business with 16,000 lenders collecting $7 billion in fees that, despite a patchwork effort by some state regulators, still goes crazy fleecing people in thirty of the states.
So, here’s the deal. The CFPB says that they are going to insist, perhaps as soon as the beginning of 2017, that lenders will have to prove what we call “affordability.” They will have to independently establish that a potential borrower has income and that the income is sufficient to allow them to afford to repay the money that they are seeking to borrow. Furthermore the CFPB is reportedly going to cap the number of rollovers of the original loan, and that’s almost as critical as the affordability test. From ACORN’s research, and extensive studies we have done in Canada, the whole business model that drives payday lending is recidivism, rolling over the original loan multiple times with additional fees and interest charges, and coming back, over and over again for more.
We’ll have to see the final published regulations to know how tightly the CFPB is going to monitor these rules. We have been demanding in Canada a central database that would keep a family from jumping from one payday lender to another and getting caught in the debt trap, but it is hard to tell if the CFPB has been willing to take that step yet, though it is well needed.
The CFPB is also proposing that before a payday lender debits a borrower’s account they will have to provide three days’ notice. This could prevent larding on of bank fees, which exacerbates the original debt.
Is this fight over or just beginning? Well, it’s really just what-and-what. The rules will be subject to public comment until mid-September, and the industry – and its political friends – can be counted on to fight furiously even over these measures, which also leave a lot to be desired. There’s no cap on the level of debt that would be deemed affordable. There’s no clear standard on what defines affordability. There’s no cap on fees or interest rates. There’s no clarity on pyramiding loans from multiple lenders. There’s no disclosure of the larger banks and institutions that are providing the money for these loans.
You get the message. This is a first step, not the last. But, it’s a start to bringing this industry under control nationally, and that’s something that will matter greatly to many low-and-moderate income families.