As the Consumer Financial Protection Bureau (CFPB) considers new rules to address predatory practices in payday and similar types of lending, U.S. Senators Tom Udall and Martin Heinrich joined a group of Senators in expressing support for initial steps the agency has taken and urging the agency to issue strong rules to combat the "cascade of devastating financial consequences" that these high-priced loans often have on consumers.
"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 in a letter to CFPB Director Richard Cordray. "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."
Payday loans, which use the borrower's next paycheck as collateral, often carry annualized interest rates in the triple digits. Such loans frequently trap borrowers in a predatory cycle of debt, with a 2014 CFPB study finding that eighty percent of payday loans are rolled over or renewed within two weeks.
"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 continued.
Joining Udall and Heinrich in signing the letter are U.S. Senators Jeff Merkley (D-OR), Dick Durbin (D-IL), Chris Coons (D-DE), Tammy Baldwin (D-WI), Richard Blumenthal (D-CT), Cory Booker (D-NJ), Barbara Boxer (D-CA), Sherrod Brown (D-OH), Maria Cantwell (D-WA), Ben Cardin (D-MD), Dianne Feinstein (D-CA), Al Franken (D-MN), Kirsten Gillibrand (D-NY), Mazie Hirono (D-HI), Tim Kaine (D-VA), Angus King (I-ME), Amy Klobuchar (D-MN), Patrick Leahy (D-VT), Edward J. Markey (D-MA), Chris Murphy (D-CT), Gary Peters (D-MI), Jack Reed (D-RI), Bernie Sanders (I-VT), Brian Schatz (D-HI), Chuck Schumer (D-NY), Jeanne Shaheen (D-NH), Debbie Stabenow (D-MI), Elizabeth Warren (D-MA), Sheldon Whitehouse (D-RI), and Ron Wyden (D-OR).
The letter is supported by the Americans for Financial Reform, the Center for Responsible Lending, Consumer Action, the Consumer Federation of America, Consumers Union, the NAACP, the National Consumer Law Center, National Fair Housing Alliance, National People's Action, PICO Network, PIRG, and the Woodstock Institute.
The full text of the letter is 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.