Lenders Must Determine Upfront If Consumers Have the Ability to Repay Loans

Payday and title loan traps

October 5, 2017 The Consumer Financial Protection Bureau (CFPB) has developed a new rule which has common-sense protections cover loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments.

“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.”

Payday and title loans start a never ending cycle of borrowing, paying and borrowing

Borrowers promise a large portion of their paychecks to repay loans with interest rates of over 300 percent or higher. Many times the borrowers are using their only form of transportation as collateral for the loan which, if they fail to pay on time leads to repossession of their vehicle which results in losing their job.  Even if the first loan can be repaid the high interest rate will force the borrower back to the lender for a new loan, often the next month.  According to the CFPB More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter. And nearly one-in-four initial payday loans are re-borrowed nine times or more, with the borrower paying far more in fees than they received in credit. 

This can become a never-ending debt trap resulting in repossessed vehicles, bounced checks (with additional fees) and evictions (due to unpaid rent) which ultimately affects the entire family.

CFPB’s Rule to Stop Debt Traps:

The CFPB rule aims to stop debt traps by putting in place strong ability-to-repay protections. The specific protections under the rule include:
• Full-payment test: Lenders are required to determine whether the borrower can afford the loan payments and still meet basic living expenses and major financial obligations.
• Principal-payoff option for certain short-term loans: Consumers may take out a short-term loan of up to $500 without the full-payment test if it is structured to allow the borrower to get out of debt more gradually.
• Less risky loan options: Loans that pose less risk to consumers do not require the full-payment test or the principal-payoff option – limits on the number of loans per year and interest rate.
• Debit attempt cutoff: The rule restricts the lender accessing the borrower’s checking or prepaid account without additional authorization from the borrower (helps to limit continuing over draft fees).

A fact sheet summarizing the CFPB rule on payday loans.

Who is the CFPB? The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.

Unfortunately Pres. Trump has taken steps to gut CFPB in order to protect big business.