CFPB Putting a Stop to 'Payday Debt Traps' With New Rule
The CFPB's new rule to limit payday lending was greeted Thursday with praise by consumer advocate groups, caution by CUNA and outright opposition by the organization representing the lenders.
On Thursday the CFPB finalized its rule requiring lenders to check the ability of borrowers to repay, limit loan flipping and cap automatic debit attempts. The CFPB said it developed the rule over five years of research, outreach, and a review of more than one million comments from lenders, borrowers and consumer advocates.
“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” said CFPB Director Richard Cordray. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”
The rule would take effect in 21 months, requiring lenders to:
- Perform a “full-payment test” on borrowers to see whether they have sufficient income to pay off the loan within two weeks or a month and still meet basic living expenses and other financial obligations.
- Issue no more than three loans in quick succession to limit “flipping.”
- Stop automatic debits from borrowers’ checking accounts after two straight unsuccessful attempts. The lender must obtain a new authorization from the borrower before trying again.
- Warn borrowers in writing before making a debit attempt at an irregular interval or amount.
The CFPB said the rule does not cover loans that generally meet the parameters of “payday alternative loans” authorized by the NCUA. These low-cost loans cannot have a balloon payment and repeat borrowing is limited. The rule also excludes from coverage certain no-cost advances and advances of earned wages made under wage-advance programs offered by employers or their business partners.
CUNA has followed the rule-making closely, and said Thursday it was analyzing the new rule.
“The CFPB has indicated that they have heard the loud voices of America’s credit unions and have made significant changes to its original proposal,” said Ryan Donovan, CUNA’s chief advocacy officer. “CUNA is closely analyzing the CFPB’s small-dollar rule to assess exactly what it means for credit unions and their members.”
Adam Lee, incubator director for the Filene Research Institute, said the specific impact on the credit union is still being analyzed, but the consumer need for affordable credit will continue to grow.
“Credit unions should use their energy and focus to pursue the tremendous opportunity the regulations present in filling the void left by providers exiting this space, as well as the growing consumer need,” Lee said. “Credit unions have an opportunity to respond positively and lead the way in meeting consumers’ immediate needs — like small dollar lending— but also help them achieve longer-term financial health. That is the credit union difference.”
The Community Financial Services Association of America (CFSA), a Washington, D.C., group formed by Advance America and other major payday lenders, in 1999, said that 19 million U.S. households rely on these short-term, small-dollar loans. CFSA CEO Dennis Shaul said Thursday the new rule was “hideously complex” and would harm families who rely on payday loans to manage budget shortfalls or unexpected expenses.
“The CFPB’s misguided rule will only serve to cut off their access to vital credit when they need it the most,” Shaul said.
However, the rule was praised by consumer advocates, including the Center for Responsible Lending, Americans for Financial Reform, The Leadership Conference on Civil and Human Rights, the National Baptist Convention and the NAACP.
Mike Calhoun, President, Center for Responsible Lending, called the rule an “important milestone in providing families with reasonable financial products” even though some provisions where too loose, including the limits on loan flipping. He said 94% of payday loans are issued to borrowers who have had a similar loan within the past 30 days.