CFPB’s Proposed Payday Lending Rules: A Big Step in the Right Direction
Photo via Scurzuzu on Flickr
By Sarah Belton
Cartwright-Baron Attorney
Reckoning day for payday lenders has finally arrived. To quote President Obama’s prepared remarks for his speech in Birmingham, Ala., “if you’re making a profit by trapping hard-working Americans in a vicious cycle of debt, then you need to find a new way of doing business.”
We agree. For years, Public Justice has been at the forefront of the battle to hold payday lenders accountable. We’ve successfully litigated a series of class actions to combat illegal lending practices, and were part of teams that won the largest settlements against payday lenders in history.
While payday lenders have moved their business practices online and some have even hidden behind sham affiliations with Indian tribes to take advantage of the tribes’ sovereign immunity from state laws, we are working to expose these rent-a-tribe arrangements to ensure that lenders can be held accountable when they break the law. And over the years we have been vocal about the evil that is payday lending: a business model that depends on trapping consumers in a cycle of debt and explicitly targets economically vulnerable individuals and communities of color.
Today, the Consumer Financial Protection Bureau announced that it is considering proposed rules aimed at regulating short-term credit products, including payday loans. Under the proposals, payday lenders could either prevent debt traps at the outset of lending or protect against debt traps throughout the lending process.
For example, before extending a loan, payday lenders would be required to evaluate a consumer’s ability to repay the loan accounting for major financial obligations and living expenses. Only after deciding that a consumer has the ability to repay a loan—including interest, principal, and any fees—could the loan be offered. Or, lenders would limit the number of loans that a consumer may take out in a row.
Public Justice joins with other advocates for consumers and low-income persons, community groups, and members of the public, in commending the CFPB’s actions. Increased regulation of this industry finds strong empirical support, which continues to show the devastating effects that payday loans have upon consumers. According to data accompanying today’s announcement, approximately 2.5 million households rely on a payday loan each year.
Often, families turn to payday loans when they are in a financial bind and lack the money to pay the rent or mortgage, utilities, or the car payment. But the financial pressure is rarely alleviated by a single short-term loan. Just last year, the CFPB published a study showing that 4 out of 5 payday loans are rolled over into another loan within 14-days. The CFPB’s recognition of this problem and its proposals are a step in the right direction.
And yet.
The industry has achieved its expert status in making money by adapting its business model to avoid complying with laws and in exploiting loopholes within the laws it can’t avoid. Against the backdrop of a financial recession and a mortgage crisis, the payday lending industry has experienced tremendous growth, collecting approximately $8.7 billion annually in interest in fees.
The CFPB’s proposals—and the compliance choices they leave to payday lenders—create some loopholes. Given payday lenders’ past actions, there is some reason to be concerned that these loopholes could subsume the regulations by allowing lenders to work around any new rules that are adopted.
And even strong regulations won’t change the underlying financial realities that lead families to turn to payday loans to pay for essential needs. The CFPB’s proposals are a welcome development and an integral part to addressing the debt trap. But it will take more to keep millions of families from needing to rely on payday loans in the first place.
