As the Consumer Financial Protection Bureau (CFPB) continues to collect feedback on its recently proposed rules for payday lending, the bureau also is curious about other high-risk loan products and practices that fall outside the scope of the proposed rules, but still impact consumers who may be short on cash in similar ways.
In a July 21 CFPB blog post, Acting Deputy Director David Silberman invited consumers and interested parties to comment on a proposed rule that would require lenders to determine whether borrowers can afford to pay back payday loans, which he noted can carry an average annual interest rate of more than 300 percent, in addition to other fees. The CFPB is concerned that some people who turn to payday and similar loans to make ends meet may fall into debt traps as they struggle to pay back these loans, and its proposed rule, published in the Federal Register on July 22, would cover payday, vehicle title and certain high-cost installment loans. Comments are due Oct. 7, and as of press time, the CFPB had received more than 3,200 comments.
But the bureau also is seeking feedback on other potentially high-risk loan products and practices that are not specifically covered by the proposed rule, as well. Tucked into Silberman’s blog post was a request for information (RFI) from consumers and their advocates, financial institutions that could be impacted by a proposed rulemaking and other interested parties on consumer loans that may fall outside of the current proposal, but are designed to serve similar populations.
Although the proposed payday loan rules cover lenders’ underwriting practices and attempts to withdraw loan payments from consumers’ bank accounts, they do not cover all loans made to consumers facing liquidity shortfalls, Silberman noted. The RFI lists pawn loans, certain money purchase loans, real-estate secured credit, student loans, credit card loans and credit-related ancillary products, as well as lenders’ collection practices, as types of transactions that are not covered under the current proposed rule, but may be in need of future CFPB rulemakings, supervision, enforcement or consumer education initiatives.
“The bureau is seeking additional information about forms of non-covered credit offered to the types of consumers who use covered loans to deal with cash shortfalls, including the types and volume of installment and open-end credit products that would not be covered by the concurrent proposal and are offered in this market segment, their pricing structures and lenders’ practices with regard to marketing, underwriting, servicing and collections,” the RFI states. “Such loans could raise substantial consumer protection concerns and might potentially be unfair, deceptive or abusive depending on the circumstances, including instances where there are long-term financial hardships imposed by such loans or where consumers fail to understand the payment structure of the loans. Since such loans lack vehicle security or leveraged payment mechanisms, the bureau is also particularly interested in any other mechanisms or practices that lenders may use with regard to such loans to mitigate the risk that consumers would be unable to repay their loans.”
The CFPB will accept comments on this RFI until Nov. 7. So far, the bureau has received about a dozen comments, many of which were submitted by consumers who argued that such loan programs are vital to some low-income American workers. Commenter J.L. Wood, who said he has worked in the subprime lending industry for 30 years, questioned the CFPB’s analysis of such loan products and warned that “reckless regulations on this industry that is already heavily regulated on the state level will put this industry to bed and will close your estimated 16,000 storefront lenders, and most probably generate new products from offshore entities not regulated by our laws.”
“Respectfully, this service is beyond your understanding and your rules are not a remedy for this consumer,” Wood stated.
Tim Kelly of K3 Investments LLC, a small investment firm in Joliet, Ill., also questioned the accuracy of the CFPB’s data on this market and suggested that the bureau isn’t going to be able to single out any particular vendor that is causing consumer harm.
“You are looking at a subset of data of consumers with a payday loan and then making an assumption,” Kelly commented. “However, if you look at all bank fees incurred by ALL consumers, you will find the same issue being caused by various vendors. Banking data shows that a consumer that has given ACH authority to a cell phone company, Internet company or cable company is subject to the same problem your report implies, even if they do NOT have a payday loan. If you believe ACH transactions are being abused and causing consumers additional fees, then they can be abused by anyone and you will find yourself trying to regulate numerous businesses.”