The Consumer Financial Protection Bureau found in 2014 that the number of payday lenders exceeded McDonald's restaurant locations in the United States ‒ 15,766 to 14,350, respectively. Thus, it released a set of proposed guidelines June 1, 2016, for this growing lending segment. The initiative is open for public comment until Sept. 14, 2016. Addressing "payday, vehicle title and certain high-cost installment loans," the 1,334-page proposal provides guidance for lenders that it claims have unfairly exploited millions of U.S. citizens, the CFPB noted. "Covered loans are typically used by consumers who are living paycheck to paycheck, have little to no access to other credit products, and seek funds to meet recurring or one-time expenses," the bureau's report stated.
Proposed rules apply to short-term consumer loans of 45 days or less and longer term loans that "have an all-in annual percentage rate greater than 36 percent; and (2) either are repaid directly from the consumer's account or income or are secured by the consumer's vehicle." The CFPB anticipates the final rule will become effective 15 months after its publication in the Federal Register.
The CFPB also recommended that lenders be required to determine that borrowers would be able to repay the loans; notify consumers before attempting to withdraw payment from a consumer's account for a covered loan; be restricted to a maximum of two attempted withdrawals for a covered loan from a consumer's account unless directly authorized by the borrower; follow prescribed processes and criteria for registration of information systems and follow guidelines for obtaining consumer reports from those registered information systems; and be required to establish and follow a compliance program and retain certain records, including the loan agreement and supporting documentation obtained for a covered loan.
According to the CFPB, payday lender chargeoff ratios were roughly half the average amount of outstanding loans between 2011 and 2012. During this period, these lenders derived 90 percent of all loan fees from consumers who borrowed seven or more times; 75 percent came from consumers who borrowed 10 or more times. Many storefront payday lenders compensate for high loss rates by encouraging rollovers, back-to-back loans and re-borrowing. Many have implemented hybrid loans that automatically self-renew, the report stated.
The CFPB report also noted that many consumers live "paycheck to paycheck," relying on a variety of liquidity loan instruments, including credit cards, deposit account overdraft, pawn loans, payday loans, vehicle title loans, and installment loans to manage household expenses. After studying these liquidity instruments for more than four years, the bureau concurs with policymakers, consumer advocates and researchers who have determined that loan product rollovers and back-to-back loans create debt spirals for borrowers forced to renew short-term loans at high interest rates.
Twenty states require lenders to implement cooling-off periods before making new loans. Some of these laws are general; others dictate terms for "how borrowers may elect to participate in repayment plans; the number and timing of payments; the length of plans; permitted fees for plans; requirements for credit counseling; requirements to report plan payments to a statewide database; cooling-off or 'lock-out' periods for new loans after completion of plans; and the consequences of plan defaults," the CFPB stated.
CFPB guidelines also pertain to online lenders, which typically "face high costs relating to lead acquisition, loan origination screening to verify applicant identity, and potentially larger losses due to fraud than their storefront competitors," the bureau stated.
Many online lenders use deceptive loan documents that appear to offer a single-payment loan but in many cases "collect only the finance charges due, roll over the principal, and require consumers to take affirmative steps to notify the lender if consumers want to repay their loans in full rather than allowing them to roll over," the report claimed.
The report additionally cited vehicle title lenders that retain vehicle titles and other forms of security, with the right to repossess and resell the vehicle for repayment if loan terms are not met. Vehicle title loan originations were estimated at $2.4 billion in 2014, with revenue estimates from repossession and resale of approximately $3 billion to $5.6 billion.
One in five loan borrowers have had vehicles repossessed by vehicle title lenders, according to the CFPB. Findings show the overall default rate on single-payment vehicle title loans is 6 percent, and the sequence-level default rate is 33 percent, compared with a 20 percent sequence-level default rate for storefront payday loans.
The CFPB found that some vehicle title lenders install "kill switches" in vehicles. These can be remotely programmed to transmit audible sounds in the vehicle before or on loan due dates or interfere with car operation in the event of a late payment or loan default.
To comment or view a complete copy of the proposed rulemaking, visit www.consumerfinance.gov/policy-compliance/rulemaking/rules-under-development/notice-proposed-rulemaking-payday-vehicle-title-and-certain-high-cost-installment-loans/.
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