June 05, 2015

Brown Urges Action to Stop Predatory Payday Lending

WASHINGTON, D.C. – U.S. Sen. Sherrod Brown (D-OH) –– ranking member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs –– urged the nation’s top consumer agency to establish strong rules to combat predatory practices in the payday loan market.

The Consumer Financial Protection Bureau (CFPB) is now considering new rules to address payday lending, a practice that often traps borrowers in a cycle of debt. In a letter yesterday to CFPB Director Richard Cordray, Brown joined more than 30 Senators in calling on the agency to create rules that will rein in payday lenders in Ohio and nationwide.

“We support the CFPB’s initial steps towards releasing a proposed rule and urge you to issue the strongest possible rules to end the damaging effects of predatory lending,” the Senators wrote.

“Small-dollar, short-term loans with astronomical interest rates that pull consumers into a cycle of debt are predatory.  These loans have high default rates, including after the borrower has already paid hundreds or thousands of dollars because of triple-digit interest rates. […] Even if consumers do not default on these loans, high interest rates, preauthorized payment methods and aggressive debt collection efforts often cause a cascade of devastating financial consequences that can include lost bank accounts, delinquencies on credit cards and other bills, and bankruptcy.”

The Senators urged the CFPB to focus on meaningful ability-to-pay standards for small-dollar loans. Such standards could help crack down on loans with exorbitant interest rates and fees that low-income customers are unlikely to be able to repay.

Many workers turn to predatory payday loans to make ends meet. These loans can carry hidden fees and can have annual interest rates as high as 500 percent. A 2014 CFPB study found that four out of five payday loans are rolled over or renewed. These operations are thriving at the expense of low-income Americans.

The Senators’ letter is supported by Americans for Financial Reform, the California Reinvestment Coalition, the Center for Responsible Lending, Consumer Action, the Consumer Federation of America, Consumers Union, Mountain State Justice, the NAACP, the National Consumer Law Center, National Fair Housing Alliance, National People’s Action, PICO Network, PIRG, Policy Matters Ohio, the West Virginia Center on Budget and Policy, and the Woodstock Institute.

The full text of the letter follows below.

Dear Director Cordray:

We write regarding the Consumer Financial Protection Bureau’s (CFPB) efforts to study and address payday lending practices. We support the CFPB’s initial steps towards releasing a proposed rule and urge you to issue the strongest possible rules to end the damaging effects of predatory lending.

Small-dollar, short-term loans with astronomical interest rates that pull consumers into a cycle of debt are predatory.  These loans have high default rates, including after the borrower has already paid hundreds or thousands of dollars because of triple-digit interest rates. Notably, the typical borrower of a two-week loan is in debt for more than half the year. In addition, longer term high-cost installment loans with smaller payments than lump-sum payday loans can result in high default or refinancing rates, high rates of bounced payments and other harmful consequences. Even if consumers do not default on these loans, high interest rates, preauthorized payment methods and aggressive debt collection efforts often cause a cascade of devastating financial consequences that can include lost bank accounts, delinquencies on credit cards and other bills, and bankruptcy. 

Predatory lenders should not be able to continue unfair, deceptive, and abusive acts or practices that are designed to trap borrowers in a cycle of debt. A CFPB study found that 75 percent of loan fees on payday loans came from consumers with more than 10 transactions over a twelve-month period. This is a business model rooted in preying on individuals and families that have no ability to repay, and the CFPB has a critical opportunity to protect consumers by issuing strong rules. We hope that the Bureau will do so, while also taking into account and respecting states that have strong laws currently in place and building on their efforts to protect consumers from predatory lending.

In finalizing proposed rules, we urge you to focus on meaningful measures to ensure a consumer’s ability to repay. In the outline of the proposals being considered, the CFPB wrote that it “believes that the failure to make an ability-to-repay determination results in many consumers taking out unaffordable loans.” Ability-to-repay is a fundamental element of responsible lending; however, predatory lenders, particularly those with direct access to a consumer’s checking account, have not prioritized this standard. Lending in the absence of an effective ability-to-repay determination, and monitoring of how loans perform in practice, causes substantial harm to consumers.  We urge you to give this standard appropriate consideration in the proposed rules.

We appreciate your attention to this issue and hope you will soon issue strong rules to address the predatory lending practices that will only continue to harm consumers without swift action.

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