On December 1, 2017, members of the U.S. House of Representatives introduced a proposal known as the Congressional Review Act (CRA) to repeal the new payday and car title lending rule finalized by the Consumer Financial Protection Bureau (CFPB) in October. The announcement to roll back this important consumer protection comes off the heels of the payday lenders’ latest assault to dismantle the consumer bureau. The CRA was introduced by payday lending allies Rep. Dennis Ross (R-Fla.), along with Rep. Alcee Hastings (D-Fla.), Tom Graves (R-Ga.), Henry Cuellar (D-Texas), Steve Stivers (R-Ohio), and Collin Peterson (D-Minn.).
CRA in a Nutshell
A CRA resolution is a fast-track legislative tool that Congress can use to quickly eliminate the previous agency regulations, which were years or decades in the making and the result of extensive public input. The CRA also forbids federal agencies from reissuing these rules “in substantially the same form” without express authorization from Congress. The CRA’s expedited process sidesteps normal congressional procedure and is subject to abuse. CRA resolutions can bypass congressional committees, only require a simple majority vote to approve, are not subject to the filibuster, and often result from expensive corporate lobbying. If a CRA resolution is successful, it would bar any federal agency from issuing a rule similar to the rule repealed by the CRA. In this case, if the CRA resolution is brought up for a vote and passes both chambers, it would prohibit any federal agency—like the consumer bureau—from issuing a similar rule to protect consumers from the payday lending debt trap.
This year, the Trump Administration and Members of Congress have used the CRA to erase 15 rules, including protections for consumers, workers, investors, and public health. Prior to this Congress, the CRA had been used only once in 20 years.
Predatory Lenders Using CRA to Eliminate Consumer Protections
Payday lenders are influencing their favorite members of Congress to push the CRA to repeal the Consumer Bureau’s recently issued rule to disrupt the payday lending debt trap, and to block the Bureau from issuing similar payday lending protections in the future.
Congress should reject attempts to rollback this important protection and instead pass a federal 36% interest rate cap for these types of loans–which the consumer bureau lacks the authority to do–just as it did in 2006 for active servicemembers and their families at the urging of the Department of Defense.
Fifteen states and the District of Columbia also cap payday loan rates at 36% or under, saving their residents more than $2 billion a year in fees. A coalition representing these states strongly supports the rule because it protects people wherever they may live, and it explicitly states that the rule does not prevent stronger protections. It recognizes that an interest rate cap, which the Consumer Bureau is not legally allowed to implement, is a stronger protection than the rule.
Key Facts on Payday Lending:
Polls show that nearly three-quarters of all Americans believe it makes sense to require payday loans be affordable
Payday lenders typically charge interest rates of 391 percent APR
75 percent of payday lending fees are generated from borrowers with more than 10 loans a year
The typical payday borrower is stuck in 8 loans a year, typically back-to-back – easily paying more in fees over time than the amount the actually borrowed
15 states and the District of Columbia have capped payday loan rates at 36 percent or less, saving their residents over $2 billion a year in fees annually.
Payday lenders had become such a problem on and around military bases that the Congress, with the U.S. Department of Defense’s support, made it illegal to charge more than 36 percent to active duty military personnel and their families.
Regardless of whether they are structured as short-term or long-term, these high-cost payday and car title loans are destructive debt traps that cause significant harm to borrowers, such as increased likelihood of bankruptcy, delinquency on other bills, bank penalty fees, and involuntary bank account closures.
Background
On October 5, 2017, the CFPB unveiled a new rule addressing short-term payday and car title lending, with protections which will keep millions of Americans from being intentionally trapped in 300-plus percent interest loans.
Despite these protections being the culmination of more than five years of stakeholder input and extensive research showing clear evidence of the harm caused by making these loans without regard to ability-to-repay, we expect payday lenders and their allies in Congress to stop at nothing to delay or undo the rule.
The Products Covered: Payday and Car Title Loans
The rule covers two major categories of loans, both of which carry, on average, more than 300 percent APR:
Payday loans – defined as loans in which the lender takes payment directly from the borrower’s bank account on the borrower’s payday. These are typically due in full on the borrower’s next payday. Fifteen states plus the District of Columbia prohibit these loans by enforcing rate caps of 36 percent or less annually.
Car title loans – in which the lender takes access to a borrower’s car title as collateral and can threaten repossession of the car to coerce payment. While they are illegal in a majority of states, they have a significant presence in 22 states.
The Problem: The Debt Trap
The problem is that these products are a purposeful debt trap. Given the astronomical cost of borrowing and the lenders’ extraordinary leverage – control over the borrower’s bank account and/or ability to repossess the borrower’s car – payday and car title lenders lack the incentive to make loans that borrowers have the ability-to-repay while still being able to afford basic necessities of life. In fact, lenders have just the opposite incentive: They profit when they can trap borrowers in unaffordable debt for extended periods of time. They grab the payment from the borrower’s account on payday, leaving the borrower unable to pay for rent or food unless they immediately take out or “flip to” another loan – and keep paying interest for another two weeks, and then another, and so on.
This is the debt trap, and it is the core of the payday and car title loan business model. According to consumer bureau data, more than 75 percent of payday loan fees are from borrowers stuck in more than 10 loans a year. More than two-thirds of car title loan volume comes from borrowers stuck in seven or more loans. This debt trap extracts billions of dollars annually from people with an average income of about $25,000 and leads to a cascade of financial consequences like bank penalty fees, lost bank accounts, delinquency on other bills, and even bankruptcy.
The CFPB’s Rule
The CFPB’s rule establishes an ability-to-repay principle, based on consideration of a borrower’s income and expenses, for short-term payday and car title loans (loans of 45 days or less). This is extremely significant and is particularly important for these high-cost loans where lenders require the power to seize a borrower’s bank account or car. Thus, with this protection, it is clear that payday and car title lenders cannot continue business as usual.
Over the objections of consumer advocates, the rule does permit six short-term payday loans a year to be exempt from the prescribed underwriting standards if other requirements are met. Appropriately, car title loans cannot use this exemption. The rule also fails to limit the total annual indebtedness in payday and car title loans to 90 days a year, which would be consistent with longstanding FDIC guidelines for the banks it supervises.
In its release of the rule, the Bureau recognized that what it released in its final rule is not its final step in the process to issue new protections against the payday and car title lending debt trap. The consumer bureau finalized the ability-to-repay standard for short-term loans and payment protections for short-term and certain high-cost longer-term loans. Concurrently, the CFPB stated that it has considerable concerns about the broader longer-term loan market and will continue to scrutinize those practices through supervision, enforcement, and a future rulemaking.
The final rule conditionally exempts occasional accommodation loans and loans that are generally like the National Credit Union Association’s payday alternative loans. These changes are expected to minimize the rule’s impact on community banks and credit unions.
A 2015 preliminary outline of the CFPB’s proposal had included a potential exemption from an ability-to-pay determination for certain longer-term loans if the loan’s payments did not exceed 5% of a borrower’s gross income (a payment-to-income, or PTI, ratio of 5% or less). This exemption was not included as part of the Bureau’s formal proposed rule or the final rule. We opposed an exemption from ability-to-repay based on a PTI ratio because it does not take a borrower’s expenses into account and thus will not prevent unaffordable loans and consequent harms.
What This Means for States with No Payday or Car Title Lending
Lawmakers in states that don’t have these predatory loan products must stand firm in support of their state’s usury cap. State consumer protections remain crucial. Usury caps are the most efficient and effective way to stop debt trap lending, protecting against both short-term and long-term payday and car title lending.
The CFPB is not legally authorized to cap interest rates
Congress Must Defend the Rule and Pass a Federal 36% Rate Cap
We expected payday lenders to immediately push Members of Congress to introduce a repeal of the rule under the Congressional Review Act, which would with a simple majority vote in both chambers repeal the rule and put barriers in the ways future rulemakings addressing these toxic products. The House measure has been introduced, and a Senate measure is expected to follow. Congress should reject these efforts. Members of Congress should also pass a federal 36% interest rate cap applicable to all Americans (which CFPB lacks the authority to do), just as Congress did in 2006 for active military service members at the urging of the Department of Defense (DOD).
States Continue to Play a Critical Role
The Consumer Bureau does not have Congressional authority to set an interest rate cap, but states can through its state legislature and Attorney General. Close to a third of states have rate caps on short-term loans, and more than half have caps on long-term loans. States should continue to use their authority to protect residents from high-rate loans altogether by enacting a fee-inclusive rate cap of 36% or less. State Attorneys General should vigorously enforce existing state usury caps; put in place prohibitions on unfair, deceptive, and abusive practices, and, once it goes into effect, enforce the consumer bureau’s payday and car title lending rule, which they have explicit authority to do.
Broad Public Support for the CFPB Payday Rule
Since its release, the CFPB’s payday and car title lending rule has received wide public support from national and local organizations across the country. These groups have worked tirelessly to push for strong oversight and regulation to rein in the payday lending debt trap. A poll released by the Center for Responsible Lending and Americans for Financial Reform shows that the public supports regulation of high-interest payday lending.
A list of supporting organizations is listed here and a few are mentioned below:
Ohio Poverty Law Center Executive Director Janet Hales: “We have seen first-hand how Ohio’s low-income consumers are exploited by payday and car-title lenders charging exorbitant interest rates and fees – some of the worst on the nation. The CFPB’s efforts to create more fairness through its rules will make a difference in the lives of everyday Ohioans. The Ohio General Assembly also has an opportunity to help low-income Ohioans who have nowhere else to turn by capping interest rates and closing loopholes.”
Georgia Watch Executive Director Liz Coyle: “The State of Georgia still has important work to do to reign in the title pawn lending industry, but this federal rule creates an important base of protections that did not exist before. The CFPB clearly recognizes our States’ authority to keep payday lending out, and its new rule affirms that strong interest rate caps are the best defense against predatory lending.”
Texas Fair Lending Alliance and Faith Leaders 4 Fair Lending: “The new CFPB rule applies to many of the payday and auto title loans currently being offered in Texas—including short-term loans, due in full in an average of two-weeks to one-month, and longer term loans that include a balloon payment, where the full principal is due in one large payment often after paying repeated high fees. The rule includes important standards that support successful repayment of the loans and curb the ongoing cycle of debt caused by these loans.”
Florida Alliance for Consumer Protection: “The Consumer Financial Protection Bureau (CFPB) issued its final rule today that places much needed limitations on payday loans and other predatory loan products… The most important protection provided by the CFPB is the ability to repay the loan requirement. Lenders must verify borrower’s income and expenses to be sure the borrower has the financial ability to repay the loan.”
The Leadership Conference on Civil and Human Rights President and CEO Vanita Gupta: “Payday lending is bad for many consumers, but like many predatory scams, it invariably ends up as a weapon against the disadvantaged communities that are least able to bear its terrible burden. It uses the lure of quick cash to trap struggling families in a cycle of debt and slowly drain them of what little money they have…”
President of Center for Responsible Lending, Mike Calhoun quoted in Next City: “This new rule is a step toward stopping payday lenders from harming families who are struggling to make ends meet. It will disrupt the abusive predatory payday lending business model, which thrives on trapping financially distressed customers in a cycle of unaffordable loans.”
Americans for Financial Reform Executive Director Lisa Donner in Bloomberg: “Payday and car title lenders profit from repeatedly dragging hard-pressed people deeper and deeper into debt, and taking advantage of families when they are financially vulnerable. Curbing the ability to push loans that borrowers clearly cannot repay is a key protection.”
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