WASHINGTON — Consumer advocates are urging the Consumer Financial Protection Bureau to strengthen its proposal to rein in payday lending, arguing it would still allow borrowers to be abused.
During a briefing Monday on Capitol Hill, consumer, faith and civil rights group said that the plan should close certain loopholes, including tightening exceptions to ability-to-repay requirements and allowing lenders to make a payment test based on default rates similar to other players in the industry.
"The very nature of this business depends on people borrowing and then reborrowing and racking up more fees. That is bad enough, but what is just as troubling is the way these loans have been aggressively marketed in communities of color and other vulnerable population's including older Americans who rely on social security," said Rob Randhava, senior counsel at the Leadership Conference on Civil and Human Rights. "While there is a real need for the credit that currently is being served in those communities, that credit that sounds easy but adds up to the equivalent of a triple-digit interest rates and does a lot more harm than good."
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The Consumer Financial Protection Bureau's long-awaited proposal to establish the first federal rules for payday, auto title and high-cost installment loans did not include a provision that banks had planned would allow them to compete by offering small-dollar installment loans.
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Lenders are questioning the legal justification for the Consumer Financial Protection Bureau's putting a 36% annual percentage rate threshold in its payday proposal, claiming loans made at that rate are unprofitable. That figure has been the subject of intense debate in the past decade.
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Sen. Elizabeth Warren, the founder of the Consumer Financial Protection Bureau, said Thursday she would fight back against congressional efforts to delay or revamp the agency's payday lending proposal even while she acknowledged the plan could have been tougher.
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The advocates said that, while the proposal is a step in the right direction, more can still be done, including at the state level, where interest rates can be capped.
Fifteen states and D.C. currently ban the product outright or limit it to 36% APR or less.
"But payday lenders are always trying to roll back these state interest rate limits," said Rebecca Borné, senior policy counsel at the Center for Responsible Lending.
The CFPB proposal encourages installment loans to be priced at 36% APR or below, but the agency by law cannot institute a firm interest rate cap. As a result, the plan allows exemptions for loans to offer higher rates in certain circumstances.
Consumer groups raised concerns that the payday lending proposal will be used by the industry as a way to weaken state restrictions.
"They will use these exceptions to go to the states and say 'Look, the CFPB said that this particular high-cost loan is safe or that particular loan is safe.' They will use it to try to convince state legislature to roll back those interest rate caps altogether," Borné said.
Brent Wilkes, executive director at the League of United Latin American Citizens, added that "the problem is it has been a full-court press in 50 states."
"We are nonprofits. We don't have the budgets that some of these players have to do this work" to advocate for interest rates caps, he said.
Wilkes said one effective tool has been documenting personal stories of consumers who have fallen into payday loan debt traps. He said California lawmakers were prepared to raise the state's cap for installment loans, but ultimately rejected the idea.
"Some of the documentary videos we took of folks getting ripped off at these places — we actually sent them to lawmakers offices so they could see exactly what was happening on the ground," Wilkes said. "We were actually able to get legislature to pull back to increase the efforts there."
The Rev. Sekinah Hamlin, director of the Ecumenical Poverty Initiative, said faith groups are also throwing their weight behind the payday lending proposal.
"We had a pastor who is on the Democratic Platform Committee … who was working to pressure Representative Debbie Wasserman Schultz in terms of her leadership because she was, wherever she could, she was lifting up the payday lending industry," Hamlin said. "We have to put pressure on and we are not scared to do that."
Wasserman Schultz, of Florida, chairs the Democratic National Committee and has drawn the ire of consumer groups because of her support for the payday loan industry.
The CFPB estimates that the payday loan proposal, which also covers auto title lenders, will reduce payday loan volume by 60% to 70%. Many have argued that the reduction in credit availability will hurt consumers, but Dana Wiggins, director of outreach and financial advocacy Virginia Poverty Law Center, said that consumers would be better off living with a little less rather than taking out a high-cost loan.
"All the things that people did before payday are things they can do now," Wiggins said. "A lot of the things people do to get out of the loans are things they could have done in the first place to not get the loans."
