CFPB Goes After Payday Debt Traps

The Consumer Financial Protection Bureau might be taking on payday debt traps.

Today, the CFPB announced that it is evaluating a proposal that would require lenders to take certain steps to ensure that consumers have the opportunity to repay loans, as well as restrict payment collection methods that apply fees in excess.

The protections being considered would apply to payday loans, vehicle title loans, deposit advance products, as well as certain high-cost installment loans and open-end loans.

Speaking at the Field Hearing on Payday Lending in Richmond, Virginia, CFPB Director Richard Cordray remarked, “Today we are taking an important step toward ending the debt traps that plague millions of consumers across the country. Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.”

The proposals that the CFPB is considering apply to short-term and longer-term credit products that are often targeted at the most financially vulnerable consumers. For both types of loans, the CFPB would require lenders to implement one of two options: debt trap prevention (wherein lenders would have to determine at the outset that a consumer could repay the loan and all fees on time, without defaulting or re-borrowing) or debt trap protection.

For short-term loans, protection would involve the allotment by lenders of affordable repayment options and by limiting the number of loans per borrower within specific time frames. For longer-term loans, it would mean applying either an interest-rate (and application fee) cap or limiting monthly dues to equal a maximum of 5 percent of the borrower’s gross monthly income.

As for collection practices, the CFPB is also considering proposals that would require borrower notification before accessing deposit accounts and limit unsuccessful withdrawal attempts that lead to excessive deposit account fees.