Commentary

New proposed federal rules on payday loan predators: Promising but flawed

Payday loans.jpgThe federal Consumer Financial Protection Bureau is unveiling some long-awaited proposed rules targeting the predatory payday lending industry at a big hearing in Richmond, Virginia today and you can follow along on Twitter at the hashtag #StoptheDebtTrap. Generally, the proposed rules amount to a promising start. There are, however a few worrisome potential loopholes. The good people at the Center for Responsible Lending explain:

Consumer Financial Protection Bureau to Limit Payday Loan Debt Trap; Curb 400% Interest Rate Loans

The Consumer Financial Protection Bureau will offer a first look at where the agency’s efforts to rein in the abusive practices of payday and car title lenders are headed at a Thursday hearing in Richmond, VA. The consumer agency will release information outlining their deliberations and take testimony from a panel of consumer and civil rights advocates as well as industry representatives.

Mike Calhoun, President of the Center for Responsible Lending, will present testimony at the hearing.

Calhoun comments on the proposal:

“The proposal endorses the principle that payday lenders be expected to do what responsible mortgage and other lenders already do: check a borrower’s ability to repay the loan on the terms it is given. This is a significant step that is long overdue and a profound change from current practice. If made mandatory, the ability to repay standard will help millions of borrowers avoid dangerously high-cost payday and other abusive loans. The requirement would prevent debt traps, an all-too common practice where a lender flips loans over and over and the consumer ends up paying double the amount borrowed in interest and fees. And the Bureau appropriately applies the standard to both shorter and longer term loans, including vehicle title loans.

At the same time, we are deeply concerned about provisions in the proposal, the so-called “debt trap protection options,” which would in fact permit payday lenders to continue making both short- and longer-term loans without determining the borrower’s ability to repay. The industry has proven itself adept at exploiting loopholes in earlier attempts to rein in the debt trap. The consumer agency can look to necessary revisions to the Military Lending Act after widespread abuses were found, dragging active service members into debt so damaging that a Defense Department report found it undermined military readiness.

These “options” are an invitation to evasion. If adopted in the final rule, they will undermine the ability to repay standard and strong state laws, which give consumers the best hope for the development of a market that offers access to fair and affordable credit.

We urge the consumer bureau to adopt its strong ability to repay standard without making it optional.”

Let’s hope the regulators are listening.

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