AFR Statement: Historic Opportunity to End Predatory Payday Lending

The Consumer Financial Protection Bureau (CFPB) has come out with a proposal for the first federal regulation of small-dollar consumer loans. This rulemaking could help millions of people and be a breakthrough in the struggle to end the abuses of triple-digit-interest, debt-trap lenders. To realize that potential, however, the CFPB will have to address what appear to be a number of weaknesses in this iteration.

The proposal is built around the crucial principle of requiring lenders to establish every borrower’s ability to repay. Predatory payday and car-title lenders typically do the opposite: they target people who, precisely because they lack the ability to repay the loan itself, are likely to get trapped in debt for months or years at a stretch, paying fees and interest that often end up dwarfing the amount they originally borrowed.

The Consumer Bureau has also wisely recognized the need to craft a rule covering a broad range of small-dollar loans, and not just payday and car-title loans in their most common forms. A narrower proposal would invite abusive lenders to do what they have done in many states that have taken that approach: find ways to tweak their products without giving up the fundamentally predatory business model of extracting wealth from economically vulnerable people through products designed to make their financial troubles worse, not better.

Payday lenders have been working hard to make the rule weaker than the preliminary outline released last year, however, and the proposal we see today appears to include several provisions that, unless corrected, will allow lenders to evade borrower protections and continue their abusive practices.

We will be working with our allies in communities around the country to call on the CFPB to continue its work, close the gaps, and write a final rule to achieve the vitally important goal that it has brought within reach: stopping the debt trap.