After years of research and public consultation, the Consumer Financial Protection Bureau this month issued a final rule to create new protections for payday loan borrowers. These new protections are a necessary and positive first step in eliminating the debt trap that so often results from high-interest, predatory loans — and nowhere more than Oklahoma, where we have the highest payday loan usage rate in the nation.
The new protections won’t close off all access to expensive loans, but they will curb the practices most likely to catch borrowers in debt traps, with mounting fees and interest charges on loans they simply cannot afford to pay back.
But we’re not out of the woods quite yet. This new rule could face strong opposition from the predatory loan industry and from Congress, and we must continue speaking out to ensure that these protections go into effect.
How will these new protections help people struggling with the debt trap?
Currently many payday loan companies seek out customers who cannot easily pay back their loans, so they will be forced to refinance many times, paying new fees and interest each time. These companies use aggressive marketing to target vulnerable populations who are the least likely to be familiar with traditional banking services and who are often misinformed about the terms and conditions of payday loans.
The result of this strategy is that the majority of all payday loans in Oklahoma go to borrowers who take out twelve or more loans over the course of a year – an average of one loan each month. Fifty three percent of all borrowers in 2011 took out seven or more loans over the course of the year – only 28 percent took out three loans or less.
This cycle of debt can feel nearly insurmountable for those caught in the trap. But these new protections will help individuals seeking high-interest loans. When lenders have to make sure that borrowers can afford to repay the loan, fewer people will be caught in the trap. And those who cannot get loans (because they won’t be able to afford to pay them back) will find other ways to cover their unexpected expenses. Surveys by the Pew Charitable Trusts find that when predatory payday loans are no longer an option, would-be borrowers look to safer options like cutting back on expenses, using pawn shops, or borrowing from family and friends.
What will be covered in these new protections?
The new protections will apply to any loan that will be repaid in a single payment (like a payday loan, an auto title loan, or a deposit advance) or any loan with a large balloon payment at the end. Any lender making a covered loan will now have to follow these rules:
- To ensure that consumers are not stuck with unmanageable debt, the lender will be required to first determine that the borrower can afford to repay the loan without falling behind on other necessary expenses. This means the lender will have to verify the borrower’s income and any other financial obligations (like other debt payments) and factor in the cost of the borrower’s basic living expenses. The lender can only make the loan if a borrower would still have enough income left to pay back the loan after their current expenses.
- To ensure that borrowers are not stuck in a debt trap of endlessly repeated loans, the lender cannot make any new loans to that borrower for 30 days.
- To ensure fair collection practices, lenders must get authorization from borrowers before withdrawing money from their bank account. Lenders will also be limited to two attempts to draw a loan payment from a borrower’s bank account.
These new protections don’t mean that states can’t do more to protect their citizens. They are meant to be a minimum standard. Individual states can enact their own laws to set higher standards, and many states already have much stricter rate caps and other protections than are allowed on the federal level or in Oklahoma.
So what happens now?
The rule is scheduled to take effect in the summer of 2019, but Congress could decide to reverse the rule. According to the Congressional Review Act of 1996, Congress has the right to disapprove of new regulatory rules, and predatory lenders are already lobbying to make sure that Congress does exactly that. We must fight back – contact your Representative and Senators in Washington and tell them not to block these important protections.
There is also work to be done here in Oklahoma. Last year, predatory lenders were almost successful in adding another high-cost product to the market — “installment loans” that would not be covered by the CFPB protections. Governor Fallin stepped in to veto the bill, but the lenders will almost certainly try again next year. These attempts must be thwarted. Oklahomans deserve fair lending practices, and we must be prepared to fight for them.