Last month, Consumer Financial Protection Bureau (CFPB) acting Deputy Director David Silberman testified before a House subcommittee on the Bureau’s work related to short-term, small-dollar lending. In the face of skepticism and criticism, the CFPB maintains that changes to “payday” lending practices are needed.
Silberman’s remarks to the House subcommittee largely focused on what the CFPB has characterized as the negative impact of payday lending practices on consumers. Silberman highlighted the Bureau’s findings in 2013 and 2014 reports on payday lending: For instance, a typical two-week payday loan incurs fees equaling an APR of 391 to 521 percent; lenders ordinarily do not take a consumer’s ability to repay into account; 35 percent of borrowers repay the loan without quickly re-borrowing, while 50 percent take out several loans in succession and remain in debt for extended periods of time; and 20 percent end up defaulting.
Last March, based on these findings, the CFPB released an outline of proposals covering payday and other high-cost loans. The CFPB insists that it recognizes a need for short-term, small-dollar lending but that it will put a stop to so-called “debt traps” that harm consumers. Silberman’s remarks last month reiterated elements of the proposals, such as requiring the lender to assess the borrower’s ability to repay or, alternatively, ensuring the borrower meets certain “screening” requirements; prohibiting lenders from “making loans with unaffordable payments”; limiting the number of loans a lender can make to a single borrower; and limiting the amount of debt the borrower can incur, what the lender can require as collateral and/or finance charges.
Of course, the devil is in the details. Would there be any loan option for consumers who do not meet screening requirements? Would limits on the number of loans, amount of debt and/or finance charges protect a borrower, or would the borrower simply default if left with no alternative? The CFPB’s proposal has been harshly criticized as taking away options for consumers, potentially leaving consumers without access to funds for emergency situations, harming small businesses and usurping the authority of the states and tribal nations. The CFPB, however, maintains that its proposals will protect consumers, reduce compliance costs for lenders, and bring oversight in this area of consumer lending in line with credit card and mortgage lending.
The CFPB is still in the rulemaking process. It will issue a proposed rule and invite comments from the public and industry before issuing final regulations.
Click here to read Silberman’s written testimony to the House Committee on Financial Services Subcommittee on Financial Institutions and Consumer Credit.