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Proposed rule to end payday debt traps

Posted: 4:49 PM, Jun 02, 2016
Updated: 2016-06-02 21:30:30-04

Federal regulators were in Kansas City to announce proposed changes to the payday lending industry. These will be the first rules regulating short-term loans on the national level.

The Consumer Financial Protection Bureau held a hearing in downtown Kansas City to allow both supporters and opponents of the regulations a chance to be heard.

Prior to the hearing, hundreds of people marched outside. Terrence Wise went to the hearing after working an overnight shift. He is one of 12 million people each year who take out a payday loan.

Wise explained, ”My car actually broke down and I had to get back and forth to work, so I either had an option of a payday loan or pawn my stuff. I couldn't go to a bank or borrow from family.”

That loan led to a trail of debt. “That's when the calls to my job started, I got served with some papers to come to work at work.”

The proposed changes announced Thursday will help protect borrowers like Wise.

Yolanda McGill on the Managing Council Office of Regulations for the CFPB said, “It's something that for the last couple of decades, states have been dealing with it at the state level, but there have not been federal regulations on payday lending, so this really is a first.”

Opponents of the changes attended the hearing as well. They argued these regulations will hurt both the lenders and borrowers.

Missouri State Rep. Paul Curtman (R-Pacific) said, “Although there are some people who have had horrible experiences, I know that that's happened, but there's also been a lot of people able to use these companies to get much-needed short-term cash, and I think we need to at least have the economic freedom to do that if we want to.”

According to the CFPB, more than 80 payday of payday loans taken out were rolled over or reborrowed within 30 days.

That included Wise. “I wasn't making enough hours and I wasn't going to be able to make that amount of a loan. If I would have known that beforehand and had that established, it maybe would have saved me the trouble I'm in today.”

These rules aren’t the final regulations. The CFPB is seeking public comment on the proposal before September 14.

- Full-payment test: Under the proposed full-payment test, lenders would be required to determine whether the borrower can afford the full amount of each payment when it’s due and still meet basic living expenses and major financial obligations. For short-term loans and installment loans with a balloon payment, full payment means affording the total loan amount and all the fees and finance charges without having to reborrow within the next 30 days. For payday and auto title installment loans without a balloon payment, full payment means affording all of the payments when due. The proposal would further protect against debt traps by making it difficult for lenders to push distressed borrowers into reborrowing or refinancing the same debt. The proposal also would cap the number of short-term loans that can be made in quick succession. 

- Principal payoff option for certain short-term loans: Under the proposal, consumers could borrow a short-term loan up to $500 without the full-payment test as part of the principal payoff option that is directly structured to keep consumers from being trapped in debt. Lenders would be barred from offering this option to consumers who have outstanding short-term or balloon-payment loans or have been in debt on short-term loans more than 90 days in a rolling 12-month period. Lenders would also be barred from taking an auto title as collateral. As part of the principal payoff option, a lender could offer a borrower up to two extensions of the loan, but only if the borrower pays off at least one-third of the principal with each extension.

- Less risky longer-term lending options: The proposal would also permit lenders to offer two longer-term loan options with more flexible underwriting, but only if they pose less risk by adhering to certain restrictions. The first option would be offering loans that generally meet the parameters of the National Credit Union Administration “payday alternative loans” program where interest rates are capped at 28 percent and the application fee is no more than $20. The other option would be offering loans that are payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36 percent or less, not including a reasonable origination fee, so long as the lender’s projected default rate on these loans is 5 percent or less. The lender would have to refund the origination fees any year that the default rate exceeds 5 percent. Lenders would be limited as to how many of either type of loan they could make per consumer per year.

- Debit attempt cutoff: Under the proposal, lenders would have to give consumers written notice before attempting to debit the consumer’s account to collect payment for any loan covered by the proposed rule. After two straight unsuccessful attempts, the lender would be prohibited from debiting the account again unless the lender gets a new and specific authorization from the borrower. Repeated unsuccessful withdrawal attempts by lenders to collect payment from consumers’ accounts pile on insufficient fund fees from the bank or credit union, and can result in returned payment fees from the lender. A CFPB study found that, over a period of 18 months, half of online borrowers had at least one debit attempt that overdrafted or failed, and more than one-third of borrowers with a failed payment lost their account.

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Shannon Halligan can be reached at  shannon.halligan@kshb.com.

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