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.

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LendUp to Refund $1.83 Million to Customers for Allegedly Falling Short of Payday Loan Promises

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If you’ve gotten a loan from LendUp, you might be entitled to a refund. Today, the San Francisco-based online lender Flurish, Inc., doing business as LendUp, was ordered to pay $3.6 million in refunds and civil penalties by the Consumer Financial Protection Bureau for failing to deliver the promised benefits of its products.

The CFPB said LendUp did not give consumers the opportunity to build credit and provide access to cheaper loans, as it claimed it would. The bureau has ordered the company to provide more than 50,000 consumers with approximately $1.83 million in refunds and pay a civil penalty of $1.8 million.

LendUp’s 50,000 consumers don’t need to take action to collect their $1.83 in refunds. LendUp is required to contact them individually in the coming months.

“LendUp pitched itself as a consumer-friendly, tech-savvy alternative to traditional payday loans, but it did not pay enough attention to the consumer financial laws,” said CFPB director Richard Cordray in a written statement.

According to the CFPB, despite billing itself as an opportunity to build credit, LendUp did not always report payments to credit bureaus. (That type of reporting is essential for people who want to build their credit —you can see where your credit stands by pulling your credit reports for free each year at AnnualCreditReport.com and viewing your free credit report summary, updated every 14 days, on Credit.com).

LendUp also allegedly misled consumers by advertising across the country that they’d eventually have the ability move up the lending ladder to loans with more favorable terms, such as lower rates and longer repayment periods, though the more favorable loans were not available outside of California for most of the company’s existence. It also didn’t disclose the annual percentage rate of the loans, as required by law, thereby hiding the true cost of the loan, according to the CFPB, which attests LendUp also reversed consumer pricing without knowledge and inaccurately understated finance charges.

In addition to the fines and refunds, the company must stop misrepresenting the benefits of the loans, review all of its marketing materials so it doesn’t mislead consumers and must regularly test the annual percentage rate in its disclosures to verify that it is correct. The $1.8 million in fines will go to CFPB’s Civil Penalty Fund.

Through a statement issued on its website, LendUp said the problems mostly stemmed from its earlier startup stages. “These regulatory actions address legacy issues that mostly date back to our early days as a company, when we were a seed-stage startup with limited resources and as few as five employees. In those days we didn’t have a fully built-out compliance department. We should have,” according to the LendUp statement.

LendUp went on to say it has been working to provide refunds to all affected customers, and graduated more than 20,000 customers to more favorable loans. Its current compliance team (of 10) and separate in-house legal team (of six) now routinely weigh in when each new product is introduced, said the company’s statement.

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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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