OP/ED: CFPB Should Strengthen Its Payday Loan Rules

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A few years ago, Corri Varner of Savage, Minnesota needed a new pair of glasses so she could drive to her church. She was short on funds and went to a payday lender to borrow money to cover the cost. She was loaned the money, but it came with a steep fee and high interest rate. When her loan came due, she needed to take out a new loan to cover the previous loan, plus the fee and interest. Her new loan came with its own set of high fees and interest rate. Before she knew it, Corri was stuck in a “debt trap” – being forced to borrow each month to pay off the last month’s loan.

She isn’t alone. Each year millions of Americans get stuck in similar debt traps because of predatory payday lenders.

The good news is that earlier this year, the Consumer Financial Protection Bureau (CFPB) took a first step to crack down on lenders that make high interest, short-term loans. It has drafted new rules to make sure payday lenders don’t saddle consumers with excessive fees and outrageous interest rates. But the CFPB still has the opportunity to change its rules before they take effect, and I’m urging them to stand up for consumers by eliminating loopholes in their proposed rules and making sure the rules are as strong as possible.

According to the CFPB, 70% of borrowers of payday loans are forced to take out another loan when their first loan expires. And one in five borrowers are forced to repeat this cycle ten times or more. These debt traps can rob consumers through outrageously high charges – often with interest rates of more than 300% a year. And lenders sometimes cause consumers even more financial trouble by making repeated attempts to debit a customer’s bank account, even if there’s no money in it. That can put consumers on the hook for hundreds of dollars in overdraft fees.

The CFPB’s new rules would require a payday lender to verify that a customer actually has the ability to repay a loan before it’s issued. That means payday lenders have to check a consumer’s income, debt, and other data before making a loan, to ensure the customer has the resources to repay it. A family needs to put food on the table, pay rent, or make a car payment. And the rules will also prevent payday lenders from repeatedly debiting a customer’s account if the account doesn’t have any money in it. That means payday lenders won’t be able to run up overdraft fees as some have in the past.

While these rules will be good for consumers overall, it’s important to close loopholes that could undermine their effectiveness. For example, in some cases, under the CFPB’s proposed rules, payday lenders would be allowed to make up to six loans to a person without having to do a full review of the borrower’s ability to repay. In addition, the proposed rules wouldn’t apply to some longer-term loans either. So, I’ve been pushing the CFPB to close these two loopholes before the payday lending rules take effect.

In Congress, I’m also taking on abusive payday lenders. First, I’m fighting for legislation to cap the interest rates that payday lenders can charge. Instead of charging interest rates higher than 300% a year, I think we should set a national cap on how much lenders can charge, just like the 15 states that have already enacted interest rate caps of 36% or lower. And second, I’ve been pushing for legislation to crack down on online lenders that try to skirt U.S. laws by setting up their computers in foreign countries.

The new payday lending rules are an opportunity to secure a big step forward for this country’s working families. Although there’s more to do, we should be glad that for the first time, our country will soon have basic, national standards for payday lenders. It’s an important step to stopping the debt trap cycle that payday lenders have been forcing upon Americans.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

Image: Zoran Zeremski

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New Rules Aim to End Payday Loan ‘Debt Traps’, CFPB Says

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Claiming Americans consumers have been “set up to fail” by the short-term lending industry, federal regulators on Thursday issued sweeping new rules that would drastically alter the payday and title lending industries.

Under the proposed rule from the Consumer Financial Protection Bureau, short-term lenders would have to verify borrowers’ ability to promptly repay loans, and be prevented from repeatedly issuing loans to the same consumers.

“The Consumer Bureau is proposing strong protections aimed at ending payday debt traps,” said CFPB Director Richard Cordray. “Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt. It’s much like getting into a taxi just to ride across town, and finding yourself stuck in a ruinously expensive cross-country journey. By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail.”

The CFPB has studied the short-term lending industry for several years, so the new rules were expected.

The ability-to-repay provision would require that lenders verify a borrower’s after-tax income, government benefits or other sources of income, and make sure that borrower can make timely loan payments while still being able to afford basics, like food and shelter. Lenders would also be required to check a consumer’s credit report to verify the amount of other outstanding loans and required payments. (You can get a free credit report summary on Credit.com to see where you stand.)

The new rules also include provisions designed to prevent consumers from being hit with drastic fees, such as repeated attempts to collect debts from depleted checking accounts.

“After two straight unsuccessful attempts, the lender would be prohibited from debiting (a borrower’s) account again, unless the lender gets a new and specific authorization from the borrower,” the CFPB said.

The proposal would also cap the number of short-term loans that can be made in quick succession. CFPB research has shown that while payday loans are designed for the short term, many borrowers simply renew their loans when payment is due. One CFPB study found that 80% of payday borrowers took another loan out within 30 days.

Alert to industry criticism that regulating the payday marketplace would make it impossible for consumers to get any short-term credit, the bureau tried to strike a balance, leaving some lending possibilities open.

Under the proposed rule, consumers will be allowed to borrow a short-term loan of up to $500 without passing the so-called “full-payment test,” as long as they have not used short-term loans for more than 90 days during the previous year and the loan is not secured with a car title. Lower interest short-term loans – with a total borrowing cost of 36% interest or less — will also be permitted in certain circumstances.

Consumer groups greeted the CFPB rules with enthusiasm.

“Since the CFPB was created, the Bureau has worked diligently to understand the payday and car title market, examine the consumer experience and develop focused and data-driven interventions to prevent harmful practices,” said Tom Feltner, Director of Financial Services at Consumer Federation of America.

Industry groups, however, warned that regulations to short-term loans could force Americans to turn to even less attractive alternatives.

“The Bureau continues to miss the mark for millions of Americans struggling to make ends meet and effectively forces most banks to stay on the sidelines due to greater compliance burdens,” said Richard Hunt, president and CEO of the Consumer Bankers Association. “Consumers across the country will now turn to pawnshops, offshore lending, and fly-by-night entities that will be more costly to them. We will continue to work with the Bureau to develop products and services that are reasonable and meet consumer needs,”

The public comment period on the new rules will begin shortly and continue until Sept. 14. The CFPB is expected to issue its final rule afterward.

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An Early Christmas Gift From the CFPB: 130K Borrowers’ Loans Are Forgiven

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A short-term, high-cost lender that tried to collect debts by in-person visits at borrowers’ homes and workplaces has ceased dealing in payday loans, and about 200,000 consumers will get refunds or debt collection relief, federal regulators said Wednesday.

Austin-based EZCORP is accused of potentially revealing details about consumers’ debts to third parties during home or workplace collection attempts, a violation of federal law. The firm is also accused of simultaneously initiating electronic transfers valued at 50%, 30%, and 20% of a consumers’ outstanding debt balance, causing overdrafts and other problems for borrowers.

EZCORP operates a collector of pawn shops in and around Texas, and until recently, provided high-cost, short-term, unsecured loans, including payday and installment loans, in 15 states and from more than 500 storefronts. It did this under names including “EZMONEY Payday Loans,” “EZ Loan Services,” “EZ Payday Advance,” and “EZPAWN Payday Loans,” the CFPB said.

In a consent order, the bureau ordered EZCORP to refund $7.5 million to 93,000 consumers, pay $3 million in penalties, and stop collection of remaining payday and installment loan debts owed by roughly 130,000 consumers.

“People struggling to pay their bills should not also fear harassment, humiliation, or negative employment consequences because of debt collectors,” CFPB director Richard Cordray said in a statement. “Borrowers should be treated with common decency. This action and this bulletin are a reminder that we will not tolerate illegal debt collection practices.”

In July, after the CFPB announced its investigation of the firm, EZCORP announced that it would cease offering payday, installment, and auto-title loans in the United States. The public firm, which trades on the NASDAQ stock exchange, continues to operate pawn shops.

EZCORP did not admit or deny the CFPB’s consent order, but said it had settled with the bureau as a way to put legacy issues behind it.

“Given our decision in July 2015 to exit all payday, installment and auto title lending activities in the United States, we believe it is in the interests of all stakeholders to bring this issue to an amicable close,” EZCORP Chief Executive Officer Stuart Grimshaw said in a written statement. “Our focus will continue to be on responsibly and respectfully meeting our customers’ need for access to cash when they want it through our pawn business lines. We will also continue to enhance our policies, processes and procedures to improve our business performance and profitability.”

Describing in-person visits in the consent order, the CFPB says that EZCORP representatives involved third parties in their collection efforts. “If a consumer was not present or not available to speak during an in-person collection visit, then Respondent’s employee would attempt to leave a letter for the consumer with a third party, such as the consumer’s supervisor, co-worker, parent, child or roommate,” the order says.

“Third parties at consumers’ workplaces at times refused to accept these letters because the consumer could not engage in personal business matters at work. In addition, at times, Respondent’s employees were turned away from a consumer’s workplace by a third party, such as a supervisor, co-worker, receptionist or security officer, because the consumer was not permitted to have personal visitors at work,” the order said.

In a press release, the CFPB also alleged that the firm:

  • Visited consumers’ homes and workplaces to collect debt in an unlawful way: Until at least October 2013, EZCORP made in-person collection visits that disclosed or risked disclosing consumers’ debt to third parties, and caused or risked causing adverse employment consequences to consumers such as disciplinary actions or firing.
  • Illegally contacted third parties about consumers’ debts and called consumers at their workplaces despite being told to stop: Debt collectors called credit references, supervisors and landlords, and disclosed or risked disclosing debts to third parties, potentially jeopardizing  consumers’ jobs or reputations. It also ignored consumers’ requests to stop calls to their workplaces.
  • Deceived consumers with threats of legal action: In many instances, EZCORP threatened consumers with legal action. But in practice, EZCORP did not refer these accounts to any law firm or legal department and did not take legal action against consumers on those accounts.
  • Lied about not conducting credit checks on loan applicants: From November 2011 to May 2012, EZCORP claimed in some advertisements it would not conduct a credit check on loan applicants. But EZCORP routinely ran credit checks on applicants targeted by those ads.
  • Required debt repayment by pre-authorized checking account withdrawals: Until January 2013, EZCORP required many consumers to repay installment loans through electronic withdrawals from their bank accounts. By law, consumers’ loans cannot be conditioned on pre-authorizing repayment through electronic fund transfers.
  • Exposed consumers to fees through electronic withdrawal attempts:  EZCORP would often make three simultaneous attempts to electronically withdraw money from a consumer’s bank account for a loan payment: for 50%, 30%, and 20% of the total due. The company also often made withdrawals earlier than promised. As a result, tens of thousands of consumers incurred fees from their banks, making it even harder to climb out of debt when behind on payment.
  • Lied to consumers that they could not stop electronic withdrawals or collection calls or repay loans early: EZCORP told consumers the only way to stop electronic withdrawals or collection calls was to make a payment or set up a payment plan. In fact, EZCORP’s consumers could revoke their authorization for electronic withdrawals and demand that EZCORP’s debt collectors stop calling. Also, EZCORP falsely told consumers in Colorado that they could not pay off a loan at any point during the loan term or could not do so without penalty. Consumers could in fact repay the loan early, which would save them money.

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