The principle that lenders must actually evaluate the borrower’s chances of success before making a loan is just plain common sense, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray told the press Thursday in conference call about the agency’s final rule on payday lending.
“Ultimately, we believe this rule will allow for responsible lending while ensuring that people are not saddled with unaffordable loans that undermine their financial lives. That important goal is worth all the efforts we have made here,” Cordray said.
In prepared remarks for a conference call with reporters and editors, the CFPB director said that the provisions of the new rule on “Payday, Vehicle Title, and Certain High-Cost Installment Loans,” unveiled Thursday, are in addition to existing requirements under state or tribal law, which he said can go beyond federal law to be “even more protective of consumers.”
For example, he said:
- states that do not authorize payday loans will not be affected by the rule.
- states that do authorize payday loans will still be able to provide to most people the credit they need by passing the full-payment test or through one of the other options.
- All those who use payday or high-cost installment loans will be safeguarded against multiple attempts to extract payments from their accounts that cause mounting fees and penalties.
Under the final rule, lenders must conduct a “full-payment test” to determine upfront that borrowers can afford to repay their loans without re-borrowing. For certain short-term loans, lenders can skip the full-payment test if they offer a “principal-payoff option” that allows borrowers to pay off the debt more gradually.
In the press briefing, Cordray said the “full-payment test” requires lenders to verify the consumer’s income if evidence is reasonably available and pull a credit report to verify financial obligations. The rule also protects borrowers, he said, by capping at three the number of short-term loans that lenders can make in quick succession.
For certain short-term loans under $500, lenders do not have to satisfy the components of the full-payment test if they instead offer a “principal-payoff option” to allow borrowers to pay off debt more gradually, Cordray said. With this option, consumers could still take out one loan that meets the restrictions and pay it off in full.
“For those needing more time to repay, lenders may offer up to two subsequent loans, but only if the borrower pays down at least one-third of the original principal each time,” the CFPB director said. “Under this option, lenders cannot lend to borrowers who are still repaying another short-term or balloon-payment loan. They cannot make more than three such loans in quick succession. And they cannot make loans under this option if the consumer has already had more than six short-term loans or has been in debt on such loans for more than 90 days over a rolling 12-month period.”
He added that the “principal-payoff option” is also unavailable for loans that take an auto title as collateral.
In other comments, Cordray said:
- About 16,000 payday loan stores operate in the 35 states that allow payday lending, along with online lenders.
- About 95 million people live in the other 15 states and the District of Columbia, where payday lenders do not operate because of caps on interest rates and fees.
- Payday loans are generally for $500 or less, and they are typically due in full by the borrower’s next paycheck, usually in two or four weeks.
- The loans are expensive, with annual interest rates of more than 300 % or even higher.
- In a typical condition of a loan, the borrower writes a post-dated check for the full balance, including fees, or allows the lender to electronically debit funds from their account.
- Single-payment auto title loans also have expensive charges and short terms, usually of 30 days or less, but the borrowers have to put up the title to their car or truck as collateral.
- Some lenders also offer longer-term loans with a series of smaller payments for more than 45 days that then require the entire large balance of the loan to be repaid at the due date. These balloon-payment loans often require access to the borrower’s account or auto title.