The U.S. Consumer Financial Protection Bureau said it is mulling restrictions on lenders that would prevent them from repeatedly collecting payment from customers’ bank accounts without thoroughly verifying the ability to repay. The proposals even include a 60-day “cooling off” period to help prevent consumers from falling deeper into debt.
The proposed measures target the “debt trap” of excessive fees, the CFPB says. The tougher rules would apply to payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans.
Many of these products fall into the general category of “payday loans,” the name given short-term cash advances with fees that can equate to triple-digit interest rates over time. Often, customers pay those fees from their next paycheck.
“Today, we are taking an important step toward ending the debt traps that plague millions of consumers across the country,” said CFPB Director Richard Cordray. “Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay.”
Cordray said the proposals would require lenders to take steps to make sure consumers can pay back their loans.
Among those proposed steps, lenders would have to:
>>> Determine at the outset that the consumer can repay the loan when due – including interest, principal, and fees for add-on products – without defaulting or re-borrowing.
>>> Verify the consumer’s income, major financial obligations, and borrowing history to determine whether there is enough money left to repay the loan after covering other major financial obligations and living expenses.
>>> Generally adhere to a “60-day cooling off” period between loans.
If lenders want to make a second or third loan within the two-month window, they would have to document that the borrower’s financial circumstances have improved enough to repay a new loan without re-borrowing. After three loans in a row, all lenders would be prohibited altogether from making a new short-term loan to the borrower for 60 days.
The Bureau is publishing an outline of the proposals before convening a Small Business Review Panel to gather feedback from small lenders, which is the next step in the rulemaking process.
The proposals cover both short-term and longer-term credit that are often marketed heavily to financially vulnerable consumers.
“The CFPB recognizes consumers’ need for affordable credit but is concerned that the practices often associated with these products,” the agency said.
Some of the targeted practices include:
- Failure to underwrite for affordable payments;
- Repeatedly rolling over or refinancing loans;
- Holding a security interest in a vehicle as collateral;
- Accessing the consumer’s account for repayment, and;
- Performing costly withdrawal attempts.
The proposals under consideration would also apply to “high-cost, longer-term credit products of more than 45 days” where the lender collects payments through access to the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and “the all-in (including add-on charges) annual percentage rate is more than 36 percent.”
This includes longer-term vehicle title loans and certain installment and open-end loans.
Lenders of both short-term and longer-term loans often obtain access to a consumer’s checking, savings, or prepaid account to collect payment through a variety of methods, including post-dated checks, debit authorizations, or remotely created checks. However, this can lead to unanticipated withdrawals or debits and transaction fees, the CFPB says.