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From Banking and Finance Law Daily, August 18, 2016

Comments pour in for CFPB payday lending proposal

By Colleen M. Svelnis, J.D.

Several groups have submitted comment letters in response to the Consumer Financial Protection Bureau’s payday loan proposal. The proposed rule is intended to end payday loan "debt traps" by requiring lenders to ensure that consumers are able to repay their loans. Most of the letters were supportive of the proposal in general, but named specific areas where the bureau could strengthen the rule. However, two legislative members wrote of issues with the proposed rule beyond such suggestions.

Devastating effects. Representative Alcee Hastings (D-Fla) warned that if the rule is implemented in its current form, "this vital source of credit will be severely curtailed" with potentially devastating effects. He wrote that access to short-term credit is not a luxury but a necessity for some Americans.

He singled out the ability-to-repay requirement, calling it invasive and saying it would add significant costs to the underwriting process. He further noted that good-faith actors in the payday lending industry would not be able to complete this requirement. The letter stated that community banks and credit unions have said that this requirement would make them "abandon the marketplace."

Flawed basis. Shane Martin, state Senator for South Carolina, sent a letter to the CFPB, expressing concern that the proposed rule would preempt his state’s laws that "successfully balance consumer protection with equitable access to credit." He expressed his worry that the CFPB’s proposal’s "one-size-fits-all" approach set requirements that no small operator can meet and would eliminate the small businesses in South Carolina.

Additionally, Martin asserted that the bureau relied on "flawed and incomplete" research like the CFPB’s April 2013 white paper on short-term lending in constructing the proposal.

Product safety standards. Religious Action Center, a coalition of Jewish organizations, stated its strong support of the proposed rule in its comment letter. Their letter also notes support for the "ability-to-repay" principle applied in the proposal. The letter urges the CFPB to create clear product safety standards outlining what fair loans look like, because lenders determine which customers have the ability to repay. Additionally, the coalition asks the CFPB to maintain the 60-day waiting period between loans, stating that with a 30-day period, the proposed rule makes it easier for lenders to trap borrowers.

Close loopholes. The Middleburg Institute, a charitable organization located in Louisiana, has submitted a comment letter, calling the proposed rule a "critical first step" in stopping the harms of unaffordable loans, but also stating that the rule must be strengthened. Middleburg urged the CFPB to close remaining loopholes in the proposal, to ensure that loans are affordable in light of a borrower's income and expenses.

Middleburg first praised the CFPB for taking the "right approach" by requiring lenders to ensure that a loan is affordable without having to re-borrow or default on other expenses. However, the letter states that the current proposal has dangerous loopholes that undermine this standard and that there should be no exceptions from this principle.

Additionally, the letter expressed concern that the bureau should do more to ensure that short-term debt doesn’t become unaffordable long-term debt, saying the proposal "does not go far enough to prevent the flipping of borrowers from one unaffordable loan to the next."

Middleburg includes the following suggestions for the proposed rule:

  • There should be a 60-day cooling off period between short-term loans instead of 30 days.
  • The final rule should ensure that short-term loan indebtedness doesn’t exceed a total of 90 days every 12 months, consistent with FDIC 2005 guidelines for its banks.
  • The bureau should strengthen the protections against repeat refinancing of longer-term loans.
  • Lenders should be required to use an objective measure for projecting a borrower's basic living expenses and avoid over-reliance on back-end measures like default and reborrowing rates.

Proposed rule. The CFPB’s proposed rule would ban repeated debit attempts that add to consumer fees and would include not only payday loans but auto title loans, deposit advance products, and certain high-cost installment and open-end loans (see Banking and Finance Law Daily, June 2, 2016). Comments on the proposed rule are due Sept. 14, 2016.

Companies: Credit Union National Association; Independent Community Bankers of America; The Middleburg Institute; Religious Action Center

MainStory: TopStory CFPB ConsumerCredit InterestUsury Loans Preemption

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