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Consumer protection bureau finalizes rule to stop payday debt traps

Staff Reports • Updated Oct 17, 2017 at 12:00 PM

NASHVILLE – The Consumer Financial Protection Bureau issued a rule Thursday with protections that will reduce the harms of short-term payday and car-title lending to Tennessee families. 

Tennessee Citizen Action welcomed the action and called on Tennessee lawmakers to pass an interest rate cap of 36 percent or lower for both short-term and long-term payday loans, a rate that has effectively protected residents of many other states from the payday debt trap.

Payday and car-title lending costs Tennessee families nearly $403 million per year in fees. TCA executive director Andy Spears said the loans drive borrowers into financial distress by trapping them in long-term debt at triple-digit interest rates. Three quarters of all payday loan fees are from borrowers with more than 10 loans in a year.

Spears said at the heart of the CFPB rule is the common sense principle that lenders check a borrower’s ability to repay before lending money – something supported by more than 70 percent of Republicans, independents and Democrats.

“The CFPB rule’s ability-to-repay requirements and limits on back-to-back lending will help protect Tennessee families from losing millions of dollars each year to payday predators,” said Spears. “While we welcome new federal rules, our state legislature must also step up and level the playing field for consumers with a common-sense interest rate cap of 36 percent to ease the burden payday lenders put on our communities.”

The protections cover loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products and longer-term loans with balloon payments. The bureau found many people who take out these loans end up repeatedly paying expensive charges to roll over or refinance the same debt. The rule also curtails lenders’ repeated attempts to debit payments from a borrower’s bank account, a practice that racks up fees and can lead to account closure.  

“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” said CFPB director Richard Cordray. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”

Payday loans are typically for small-dollar amounts and are due in full by the borrower’s next paycheck, usually two or four weeks. They are expensive, with annual percentage rates of more than 300 percent or even higher. As a condition of the loan, the borrower writes a post-dated check for the full balance, including fees, or allows the lender to electronically debit funds from their checking account.

Single-payment auto title loans also have expensive charges and short terms usually of 30 days or less. But for these loans, borrowers are required to put up their car or truck title for collateral. Some lenders also offer longer-term loans of more than 45 days where the borrower makes a series of smaller payments before the remaining balance comes due. These longer-term loans – often referred to as balloon-payment loans – often require access to the borrower’s bank account or auto title. 

These loans are heavily marketed to financially vulnerable consumers who often cannot afford to pay back the full balance when it is due. Faced with unaffordable payments, cash-strapped consumers must choose between defaulting, re-borrowing or skipping other financial obligations like rent or basic living expenses such as buying food or getting medical care. Many borrowers end up repeatedly rolling over or refinancing their loans, each time racking up expensive new charges. More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter. And nearly one-in-four initial payday loans are re-borrowed nine times or more, with the borrower paying far more in fees than they received in credit. As with payday loans, the CFPB found that the vast majority of auto title loans are re-borrowed on their due date or shortly thereafter. 

Under the new rule, lenders must conduct a “full-payment test” to determine upfront that borrowers can afford to repay their loans without re-borrowing. For certain short-term loans, lenders can skip the full-payment test if they offer a “principal-payoff option” that allows borrowers to pay off the debt more gradually. The rule requires lenders to use credit reporting systems registered by the bureau to report and obtain information on certain loans covered by the proposal. The rule allows less risky loan options, including certain loans typically offered by community banks and credit unions, to forgo the full-payment test. The new rule also includes a “debit attempt cutoff” for any short-term loan, balloon-payment loan, or longer-term loan with an annual percentage rate higher than 36 percent that includes authorization for the lender to access the borrower’s checking or prepaid account. 

The rule will take effect 21 months after it is published in the Federal Register, although the provisions that allow for registration of information systems take effect earlier. All lenders who regularly extend credit are subject to the CFPB’s requirements for any loan they make that is covered by the rule. This includes banks, credit unions, nonbanks and their service providers. Lenders are required to comply regardless of whether they operate online or out of storefronts and regardless of the types of state licenses they may hold. These protections are in addition to existing requirements under state or tribal law.

Tennessee Citizen Action works in the public interest as Tennessee’s premier consumer rights organization. Its mission is to work to improve the overall health, well being and quality of life for all people who live and work in Tennessee.

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