May 14, 2019
Kathleen Kraninger, Director
Consumer Financial Protection Bureau
1700 G Street NW
Washington, DC 20552
Re: Comments on Proposal to Rescind Ability-to-Repay Requirements Governing Payday, Vehicle Title, and Certain High-Cost Installment Loans, Docket No. CFPB-2019-0006; RIN 3170-AA80
We recommend you view the PDF here.
Dear Director Kraninger,
Empire Justice Center writes to vehemently oppose the proposed rescission of the commonsense ability-to-repay requirements of the Consumer Financial Protection Bureau (the Bureau)’s 2017 payday and vehicle title loan rule (“Ability-to-Repay Rule” or “Rule”).
Empire Justice Center is a statewide legal services organization with offices in Albany, Rochester, Westchester and Central Islip (Long Island), New York. Empire Justice provides support and training to legal services and other community-based organizations, undertakes policy research and analysis, and engages in legislative and administrative advocacy. We also represent low income individuals, as well as classes of New Yorkers, in a wide range of poverty law areas including foreclosure prevention, public benefits, domestic violence and civil rights. Our Consumer Housing and Finance unit has focused on predatory financial services issues for almost 20 years including practices in mortgage lending, student lending, and consumer finance.
Through its longstanding criminal and civil usury laws, New York State effectively bans payday lending and auto title lending. It is illegal for any lender to make payday loans, whether in person, by telephone, or over the Internet. It is also illegal to collect on payday loans in New York.1 The Center for Responsible Lending estimates that New York consumers save almost $790 million each year because these predatory products are illegal.2 Empire Justice Center wants to see consumer protections like those in New York extended nationally.
In Mapping Financial Opportunity, the New America Foundation has mapped where traditional bank and credit union branches, alternative financial services (including auto title loan, payday loan, check cashing, tax refund, pawn shop, and rent-to-own services) and post offices are located for the entire country.3 According to this project, the Rochester NY MSA has 5.77 banks or credit unions for every alternative financial service provider, which is slightly better than the national ratio of 5.16 among the 74 MSAs with populations of 500,000 to 2 million residents. This slightly better ratio may be due in large part to New York’s ban on payday lending.
Payday and Auto Title Loans Are Debt Traps
Payday and auto title loans do not increase access to credit. Current small dollar loan products, particularly payday loans, are characterized by triple-digit interest rates, unaffordable periodic payments, and loan repayment terms designed to bring in the most income. Payday loans are typically 14- or 30-day balloon-payment loans at 391% interest or more. People who cannot afford to repay the loan must re-borrow to meet their other expenses, putting them in a cycle of debt.4 At the other end of the spectrum are examples of 18-month terms for loans of only $500, yielding astronomical fees.5 Often, borrowers pay more in interest and fees than the principal amount originally borrowed.
The very business model of these predatory products leads to a debt trap for consumers. For example, to ensure repayment, payday lenders, and other small dollar lenders outside of the banking system, obtain access to the bank accounts of their borrowers by requiring repayment by electronic funds transfer (EFT) from their borrowers’ accounts. These lenders can then withdraw funds from the borrower’s account without any additional notice or consideration for other expenses due. This, in turn, can trigger overdraft and other fees that keep a borrower in a revolving door of debt. The cost structure of these loans often incentivizes lenders to keep borrowers in the revolving door; it is more advantageous to push borrowers to take out another loan and pay another set of steep fees than it is to encourage them to pay off the loan balance in full.6 This is how payday loans trap borrowers into a cycle of unaffordable debt they cannot escape.
In a typical scenario, a consumer takes out a payday loan because they don’t have access to banking or have no small dollar loan options available. As the interest rates on these loans are exorbitantly high and the fees associated with the loans are excessive, the consumer falls behind on payments. With no underwriting requirements or tests for affordability, the lender extends another loan with an excessive interest rate to pay off the first one. It’s quicksand. With each successive loan, the dollar amounts get bigger and the debt snowballs
Eventually the consumer’s credit is damaged or destroyed and what follows is an avalanche of financial woes. Inside the debt trap, the consumer often falls behind on other bills, including utilities and rent or mortgage payments. Now at risk of eviction, foreclosure, loss of utilities, etc. the consumer has nowhere to turn. Furthermore, bad credit can inhibit the ability to find housing and employment, again perpetuating the cycle of poverty.
Even more concerning than the business model itself or the cycle of financial misery it creates, is the population that the payday lending industry preys upon. Payday lenders target low-income communities, disproportionately concentrating their stores in communities of color — communities that are already financially vulnerable due to a lack of conventional banking options.
Payday-Free States Have Alternatives
It is a myth that low and middle income people who don’t have access to conventional banking need predatory payday loans to survive. In fact, tens of millions of people live in the 16 states, along with the District of Columbia, where payday lending is banned.
Residents in New York and these other states are better off without predatory payday lending and use a range of strategies, credit and non-credit, to deal with financial shortfalls. In the research for our report, “Too Big to Fail…Too Poor to Bank,” we conducted a focus group of lower income working consumers living in Rochester, NY. Most of the consumers had at least one checking or banking account with a bank or credit union; and most used more than one option to get their financial needs met. Participants understood the various alternatives and at least some of the costs and benefits of the choices they were making. When they needed money for an emergency, participants most often turned to family members and/or friends.7
Also in our “Too Big to Fail…Too Poor to Bank” report, we note that, with proper guidelines, banks and credit unions are well-positioned to both responsibly and profitably issue small dollar loans. Nationally, three-quarters of those who use alternative financial services have an account at a bank or credit union, so banks already have an in-house market; the customer acquisition and underwriting costs for banks and credit unions would be significantly lower than those of payday lenders.8 Banks and credit unions can use information already available to them from their customers’ bank accounts to determine and document ability-to-repay as part of an inexpensive and automated underwriting process. Research suggests that customers with low credit scores “can afford payments of around 5 percent of their gross paychecks,”9 so banks can “use this threshold for a standard of affordable payments.”10 In addition, the terms of these loans could be dictated by the loan amount, with a maximum of one year for a $1,000 loan.
Banks experimenting with small dollar loan products have found success; three regulated programs saw a collective default rate of 2% to 4%.11 By strategically setting payments, fees, terms and so on, banks and credit unions can profitably offer small dollar loan products while offering safer and more practical financial alternatives to their customers.
Rochester NY area banks and credit unions are already offering affordable small dollar loan products. One bank and one credit union already offer small dollar loans to their customers. These loans have terms ranging from 6 months to 2 years depending on the interest rate, the client’s credit profile and their ability-to-repay. Some financial institutions are piloting these loans in specific branches. They use in-branch offers to fine tune the products with the needs of their customers. As a result of our “Too Big to Fail…Too Poor to Bank” report, another big local bank shared with us that the bank is working on a similar product. This bank also noted that its unsecured home improvement loan is now being advertised in low-moderate income branches and in low-moderate income neighborhoods. The loan can be for as little as $2500, and it can be used for any home purpose, i.e. water tank, roof, windows.
Keep Ability to Pay Rule
After five years of research and extensive input from a broad range of stakeholders,12 in October 2017 the CFPB issued its final payday rule to help mitigate the issue of short term loans.13 One of the rule’s key requirements is that lenders check a borrower’s ability-to-repay before making the loan. This common sense protection ensures that a borrower can repay without re-borrowing and without defaulting on other expenses, that is, without getting into the cycle of debt mentioned several times above.14 The Bureau has presented no evidence or alternative data to back up support of repealing the ability-to-repay rule, nor for the determination that the current model of payday lending is anything but abusive and unfair.
Consumers, in particular consumers in marginalized communities who are financially vulnerable, should have access to loans that are affordable and by nature aren’t meant to perpetuate debt. Access to common-sense credit is a critical component of the financial well-being of consumers.
When someone is drowning in financial crisis, the life preserver you throw them shouldn’t be made of lead. The repeal of the 2017 CFPB ability-to-repay rule will be a critical error, and will fuel the fire of poverty that is already at crisis levels in our most vulnerable communities.
Many people across the country, including people personally impacted by debt trap practices, advocates for low-income families, veterans and the elderly, responsible businesses, and many faith groups mobilized to push for strong reform of these practices from the CFPB. We are appalled that the Bureau is proposing to rip out the heart of the 2017 rule in favor of allowing payday lenders to continue these predatory practices unhindered.
Attached are our previous comments issued around payday lending, including one signed by 131 organizations and elected officials in New York State. They provide additional points re: payday-free states and the ability-to-repay rule. Please include these additional comments as part of this public file.
We urge the Bureau to withdraw the proposal and implement the 2017 rule as written without delay.
Barbara Van Kerkhove, Ph.D.
Ruhi Maker, Esq.
7 “Too Big to Fail…Too Poor to Bank: How Mainstream Financial Services Can Help Low-Income Working Families Succeed” by Barbara van Kerkhove, PhD. & Ruhi Maker, Esq. Empire Justice Center, September 6, 2018, as found at: https://empirejustice.org/wp-content/uploads/2018/09/Access-to-Credit-Report-2018-FINAL.pdf
12 CFPB’s extensive research on payday and auto title lending can be found at: Bureau of Consumer Fin. Prot., Payday Loans and Deposit Advance Products: A White Paper of Initial Data Findings, (2013), available at http://files.consumerfinance.gov/f/201304_cfpb_payday-dap-whitepaper.pdf; Bureau of Consumer Fin. Prot., CFPB Data Point: Payday Lending, (2014), available at http://files.consumerfinance.gov/f/201403_cfpb_report_payday-lending.pdf; Bureau of Consumer Fin. Prot., Online Payday Loan Payments (2016), available at http://files.consumerfinance.gov/f/201604_cfpb_online-payday-loan-payments.pdf; Bureau of Consumer Fin. Prot., Single-Payment Vehicle Title Lending (2016), available at http://files.consumerfinance.gov/f/documents/201605_cfpb_single-payment-vehicle-title-lending.pdf; Bureau of Consumer Fin. Prot., Supplemental Findings on Payday, Payday Installment, and Vehicle Title Loans, and Deposit Advance Products (2016), available at https://files.consumerfinance.gov/f/documents/Supplemental_Report_060116.pdf.
13 The 2017 Final Rule can be found at: https://www.federalregister.gov/documents/2017/11/17/2017-21808/payday-vehicle-title-and-certain-high-cost-installment-loans