Arguing payday and auto-title loans trap borrowers in a “cycle of debt,” federal officials today proposed new restrictions to clamp down on the thriving lending industry.
The Consumer Financial Protection Bureau rules would for the first time require lenders to take steps to ensure consumers have the means to repay loans they take out.
“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” CFPB Director Richard Cordray said in a statement.
“It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey,” he said.
According to the CPFB, typical payday loans of $350 charge a median annual interest rate of 391 percent. Though the loans are designed to be repaid quickly, four out of five are extended, which Cordray called a “debt trap.” One in five people defaults on payday loans, he said.
Payday and auto-title lenders are typically the lender of last resort. The industry argues it provides a vital financial service to people who can’t take out a bank loan or get credit when they need fast cash.
But consumer advocates and some state regulators have long argued that payday and auto-title lenders make little effort to verify a borrower’s ability to repay the loans, even when state laws require it. A 2015 Center for Public Integrity investigation found that some auto-title lenders approved loans with terms that took more than half the borrower’s monthly income, for instance.
Under the proposed CPFB rules, lenders must determine if a borrower can handle the payment when it’s due and still cover basic living expenses and major financial obligations. The rules also allow only two extensions of a loan.
Corday called the regulations “mainstream, common-sense lending standards” and said the new rules would “prevent lenders from succeeding by setting up borrowers to fail.”
According to the CFPB, the payday industry took in fees of $3.6 billion in 2015 operating nearly 16,000 stores nationwide. About half the states allow borrowers to pledge a car title as collateral for short-term loans, often at interest rates that can top 300 percent. Lenders can, and sometimes do, seize and sell off cars when borrowers fail to pay. The CPFP has reported that about one in five people lose their cars after defaulting.
The CFPB is seeking public comment on the proposal until Sept. 14.
The proposed rules represent a major federal push into overseeing the controversial industry, which has largely succeeded in fending off stricter lending laws in the states.
The Center for Public Integrity investigation found that title lenders have beaten back reform legislation behind millions of dollars in campaign contributions to state legislators and by aggressively challenging regulators who seek to rein them in.
Three major title lenders, their owners or key executives, pumped just over $9 million into state political campaigns over the past decade as they lobbied to kill bills that hindered their operations. Since 2011, about 150 bills to cap interest rates or crack down on lending abuses died in 20 state legislatures, the Center found.
In Virginia, where the three big lenders spread about $1.5 million in campaign cash in the last decade, five reform bills died in 2015 alone.
Virginia officials also have restricted public access to annual business reports title lenders file with the state. The reports include detailed sales figures, volume of loans, interest rates charged on loans and defaults, as well as how often the lenders get in trouble with regulators.
Three giant auto title lenders — TitleMax of Virginia Inc.; Anderson Financial Services LLC, doing business as Loan Max; and Fast Auto Loans Inc. have argued that disclosure would hurt their businesses.
The Virginia Corporation Commission, which oversees corporations in the state, has sided with the title lenders. In April, the Center filed a notice of intent to appeal the corporation commission’s decision to the Virginia Supreme Court.