WASHINGTON–The Pew Charitable Trusts has published an analysis critical of the CFPB’s new proposed rules on short-term, small dollar loans.
“The proposal falls short because it would allow payday loans with 400% interest rates to flourish while locking out lower-cost loans from banks,” wrote Nick Bourke, director of Pew’s small dollar loans project. “To correct this problem, the CFPB should ensure that its final regulations include effective, pro-consumer product safety standards, such as limiting loan payments to 5% of a borrower’s paycheck. With a few strong fixes, the Bureau could create a policy that protects millions of hard-working Americans.”
Pew noted that while the CFPB’s approach would lead to major changes in the market for payday and similar loans, the prospect of harmful loans would persist because the proposed rule would leave lenders free to charge any rate and set almost any term as long as they make a “reasonable determination” that the borrower can repay the loan.
“Under this vague directive, payday lenders are in the driver’s seat, because the rule would allow them direct access to borrowers’ checking accounts or, in the case of auto title lenders, grant them the power to repossess vehicles,” wrote Bourke. “As drafted, the CFPB rule would allow lenders to continue to make high-cost loans, such as a line of credit with a 15% transaction fee and 299% interest rate, or a $1,250 loan on which the borrower would repay a total of $3,700 in fees, interest, and principal. These and many other high-cost payday installment loans are already on the market in most states, and they will thrive if the regulation takes effect without changes.”
Bourke observed that one cautionary insight into the CFPB proposal can be seen in the fact payday lenders have been generally supportive of the new CFPB proposal.
“Unfortunately for borrowers, the CFPB’s latest proposal could delay or even remove the ‘5% payment option,’ which would protect consumers and support price competition in the marketplace,” said Pew.
Bourke reported that prior to the CFPB announcing the draft rule, at least three large banks were already preparing to use the 5% payment option to make small loans at prices far lower than those charged by payday lenders.
“By placing clear product safety standards such as the 5% payment option in limbo, the Bureau has jeopardized the only part of its original framework that could save millions of borrowers billions of dollars,” Bourke said.