A group of 32 Senate Democrats on Thursday asked Consumer Financial Protection Bureau Director Richard Cordray to issue the "strongest rules possible" against predatory lending.
Led by Sens. Jeff Merkley (D-Ore.), Dick Durbin (D-Ill.) and Chris Coons (D-Del.), the group sent a letter to Cordray asking that the final rules focus on meaningful ability-to-pay standards for small-dollar, short-term loans to prevent lenders from issuing loans with astronomical interest rates and fees that low-income customers are unlikely to be able to repay.
The CFPB in March outlined a framework for rules it's considering, including mapping out two sets of rules: debt trap prevention or debt trap protection. Lenders would be able to choose which set of rules to follow.
"Predatory lenders should not be able to continue unfair, deceptive and abusive acts or practices that are designed to trap borrowers in a cycle of debt," the senators' letter said. "A CFPB study found that 75% of loan fees on payday loans came from consumers with more than 10 transactions over a twelve-month period. This is a business model rooted in preying on individuals and families that have no ability to repay and the CFPB has a critical opportunity to protect consumers by issuing strong rules."Lenders under the prevention rules would have to verify a consumers income, debt and borrowing history when determining his or her ability to repay a loan in full and still cover their basic living expenses and loan payments.
Lenders under the debt trap protection rules wouldn't be required to do an upfront analysis of a borrowers ability to repay a loan, but all loans would be limited to $500 with one finance charge and lenders would be prohibited from holding a vehicle title as collateral on a loan. Following is a more detailed cheat sheet on what the CFPB proposals mapped out in March would require:Short-Term Loans
- The agency said it is considering 45 days as the duration defining a "short-term" loan.
- Under the "prevention" approach for short-term loans, a lender would have to verify income, other financial debts and credit history to judge if the borrower can repay, and a loan cannot be made to a borrower with any outstanding loans subject to the rules that came from another lender.
- The "prevention" requirements impose a 60-day "cooling off period" between loans. However, subsequent loans could be made within that window if the lender showed the borrower's finances had sufficiently improved. Yet, overall, no more than three loans could be made during that period.
- Short-term loan providers could alternatively choose to follow "protection" requirements that, the CFPB said, would limit "the number of loans that a borrower can take out in a row and [require] lenders to provide affordable repayment options."
- Under the "protection" approach, loans lasting no more than 45 days could not exceed $500, exceed one finance charge or force the borrower to use their vehicle as collateral. Like the "prevention" approach, borrowers could not have other outstanding loans that were provided by another institution.
- This approach would cap rollovers at two so totaling three loans and a mandatory 60-day cooling off period would then follow.
- However, those rollovers would be allowed only if "the lender offers an affordable way out of debt," the CFPB said. Here, the agency said it is considering two different paths: either requiring a principal reduction over the course of the three loans, or the lender providing a "no-cost 'off-ramp' if the borrower is unable to repay after the third loan" to avoid additional fees.
- The proposals generally define longer-term products as those lasting more than 45 days where a lender can access a borrower's deposit account or paycheck, or share ownership of the consumer's vehicle, in order to get repaid, and the "all-in" annual percentage rate including fees exceeds 36%.
- Like with the short-term loan requirements, the debt-trap "prevention" approach for longer-term products would require verification of income, other debts and credit history to determine at the outset of the loan if it can be repaid.
- Lenders choosing the "prevention" approach would have to determine a borrower's ability to repay each time the borrower tried to refinance or take out another loan. A lender could not refinance a borrower into another loan if the borrower had been delinquent on a payment and the lender had not shown that the consumer's financial situation had improved.
- The agency said it is considering two options for the "protection" approach governing longer-term products. One option follows a model used by the National Credit Union Administration for so-called "payday alternative loans."
- Under the NCUA model, a loan with principal between $200 and $1,000 and a decreasing balance would be capped at a 28% interest rate and a $20 application fee. A consumer could only take out two such loans within a six-month period.
- The agency said it is also considering a "protection" option whereby a consumer cannot be required to make payments each month that exceeds 5% of the borrower's monthly income. The borrower also could not take out more than two such loans within a 12-month period.
Restrictions on Collection Practices
- For products covered by the CFPB rules, the agency said it is considering requiring lenders to give borrowers three business days' notice before attempting to collect payment through a deposit or prepaid account.
- To limit fees that result from repeated transactions, a lender could not attempt a third withdrawal from a consumer's deposit account if the two prior attempts were unsuccessful.