CFPB Hearing Payday Loans Read This and WEEP!

Prepared Remarks of CFPB Director Richard Cordray at the Field Hearing on Payday Lending

“Under our proposed framework, we define the short-term credit market as loans for 45 days or less. These are typically payday loans or vehicle title loans, but one important feature of our rules is that they would apply to any lender issuing similar short-term loans. The rules thus would cover all firms that offer competing products in this segment of the market through any channel, including both storefront and online lenders.”

“Specifically, the proposals under consideration would require the lender to make a reasonable determination that the consumer could repay the loan when it comes due without defaulting or re-borrowing. This requirement applies to the whole loan, including the principal, the interest, and the cost of any add-on products. Lenders would have to engage in basic underwriting by verifying the consumer’s income, major financial obligations, and borrowing history, and determining that the consumer can meet their obligations, cover basic living expenses, and cover payments on the loan.”

“In cases where the consumer takes out three loans in close succession, there would be a mandatory 60-day cooling-off period after the third loan to give the consumer enough time to recuperate financially before borrowing again.”

“We are considering two alternatives. Under the first alternative, lenders would have to decrease the principal amount for each subsequent loan so that after three loans the debt is paid off. At that point, a 60-day cooling-off period would kick in. Under the second alternative, when the borrower still cannot repay after two rollovers, the lender would have to offer the consumer an off ramp consisting of a no-cost extended payment plan. After that, a 60-day cooling-off period would apply. Under either approach, the lender could not lend more than $500 or take a security interest in a vehicle title, and the lender could not keep the consumer indebted on these loans for more than 90 days in a 12-month period.”

“The second part of our proposal today covers certain longer-term, higher-cost loans. More specifically, the proposal under consideration would apply to credit products of more than 45 days where the lender has access to the consumer’s bank account or paycheck, or has a security interest in a vehicle, and where the all-in annual percentage rate is more than 36 percent.”

“As with short-term credit products, the debt trap prevention requirements would mean the lender must determine, before a consumer takes out the loan, that the consumer can repay the entire loan – including interest, principal, and the cost of add-on products – as it comes due. For each loan, the lender would have to verify the consumer’s income, major financial obligations, and borrowing history to determine whether the borrower could make all of the loan payments and still cover her major financial obligations and other basic living expenses.”

“If the borrower has difficulty repaying the loan, the lender would be barred from refinancing the old loan upon terms and conditions that the consumer was shown to be unable to satisfy in the first place.”

“Alternatively, lenders could adhere to the debt trap protection requirements. We are considering two approaches here. Under both approaches, lenders could extend loans with a minimum duration of 45 days and a maximum duration of six months. Under the first approach, lenders would generally be required to follow the same protections as loans that many credit unions offer under the National Credit Union Administration’s existing program for “payday alternative loans.” These loans protect consumers by charging no more than 28 percent interest and an application fee of no more than $20. Under the second approach, we are considering limiting monthly loan payments to no more than 5 percent of the consumer’s monthly income. This would shield the bulk of their income from being eaten up by repayments, while the six-month limit also prevents the payments from extending in perpetuity.”

“We are also considering new consumer protections about when and how lenders are able to access consumer accounts. To mitigate the problems of racking up excessive overdraft and insufficient funds fees, we are weighing two measures: requiring lenders to notify borrowers before accessing their deposit accounts, and protecting consumers from repeated unsuccessful attempts to access their accounts.”

“The first provision would require lenders to give notice to consumers three business days before trying to withdraw funds from the account, including key information about the forthcoming attempt. The goal here is to protect consumers by giving them more information to help them plan how to manage their accounts and their overall finances.”

“The second provision would require that if lenders make two consecutive unsuccessful attempts to collect money from consumers’ deposit accounts, they could not make any further attempts to collect from the account unless the consumer provided them with a new authorization.”