By TED CARTER
Drawing from a doctrine applied to new rules for residential mortgages, the U.S. Consumer Financial Protection Bureau is proposing that payday lenders verify a borrower’s ability to repay before making a short-term, low dollar loan.
Payday lenders now require that borrowers have both a source of income and an active checking account. But the CFPB wants to require payday lenders to “determine at the outset” that the borrower is not taking on unaffordable debt.
Lenders, however, could avoid making that judgment by instead adhering to various restrictions designed to ensure that borrowers can affordably repay their debt. All payday loans and fees would be limited to $500 under the proposed rules, the same as Mississippi’s payday loan limits.
On the front end, said CFPB spokesman Sam Gifford, the lender has a choice of verifying ability to repay or doing an arrangement by which he can’t lend more than $500 and no rollovers are allowed.
Further, lenders who select the second alternative can loan only twice in a 12-month period, according to Gifford. “No more loans after that,” he said. “There are no exceptions.”
The borrower can’t be in debt to the payday lender for more than 90 days total through the 12 months, he said.
The first option requires a 60-day cooling off period between loans “unless the lender can verify that the borrower’s financial status has improved,” Gifford said. For instance, the borrower would have had to lower overall debt, get a higher-paying job, a pay raise or other new source of income, he added.
Under both options, lenders must also give the borrower three days’ notice before seeking to take money from the borrower’s account. The lender would be limited to two attempts to withdraw money from the borrower’s account.
The bureau, created through the 2010 Dodd-Frank Wall Street Financial Reform and Consumer Protection Act, says it will create a small-business review panel to gather comments and suggestion from small-dollar lenders.
Payday lenders will argue they provide a much needed service to cash-strapped Americans and are closely regulated in Mississippi and other states in which they are allowed. Without the short-term loans, Americans would be overloaded with bank overdraft fees or left with no access to money for unexpected expenses, the lenders say.
The new rules could have a huge bearing on Mississippi, whose approximately 1,100 payday lending stores give the state the nation’s highest concentration of such lenders. The lenders operate under the state’s 2012 Check Cashers’ Act.
Unlike Mississippi law, the new rules would allow loan “rollovers,” but only if the lender offers the borrower an affordable way out of debt.
The bureau is considering two options for this. The first would require that the principal decrease over the three-loan sequence so that it is repaid in full when the third loan is due.
The second option would require the lender to provide a no-cost “off-ramp” if the borrower is unable to repay after the third loan. The off-ramp would be designed to allow the borrower to pay the loan off over time without further fees.
Whether Mississippi’s rollover ban would stand upon adoption of the bureau’s rollover rules is unclear, according to Stephen Schelver, general counsel for the Mississippi Department of Banking & Consumer Finance.
“How this is going to work with each state’s laws remains to be seen,” Schelver said, though he emphasized that the proposed rules would require payday lenders who did the rollovers to meet a high bar in verifying a borrower’s ability to repay.
The CFPB proposal would also remove a fee-collection glitch in Mississippi’s payday lending law that legislators have refused to fix since creating the glitch three years ago.
Legislators in renewing the payday lending law and making it permanent raised the amount of loans and fees that could be borrowed at one time from $400 to $500. In a supposed boon to the borrower, legislators set a 30-day repayment period for all loans above $250. Loans below $250 carry a two-week repayment period.
However, legislators did not restrict the number of loans that could be issued at one time. Thus, by issuing four loans of $100, the lender could make as much in two weeks as he could in 30 days.
The limit to a single loan at a time would end that practice.
Veteran Mississippi credit union executive Bill Bynum, chairman & CEO of Hope Enterprise Corp., parent of Hope Federal Credit Union, said the ability-to-repay rule will be critical in reforming a system that he says now exposes borrowers to a cycle of debt that can last months, or even years.
“The ability-to-repay provision is an important one that a lot of consumer advocates have been asking for for a long time,” said Bynum, who serves on the CFPB’s advisory committee.
“It is only prudent that lenders know their borrowers have the ability to repay.”
For years in Mississippi, Bynum said, decisions on low-dollar, short-term lending have been “based more the ability to collect than the ability to repay.”
That, he added, “is not a smart or responsible way to lend money.”
The Hope Federal Credit Union that Bynum oversees seeks to set up shop and offer financial services in communities where payday lenders have taken over after the departure of banks and other conventional lenders. Consumers in these banking deserts are left to seek loans from a lender whose business is “predicated on abusive, irresponsible terms,” he said.
In many instances, he said, Hope Federal will refinance someone out of a predatory loan thus help to keep their families above water.
As part of the rule-making process, lenders have been given multi-page questionnaires seeking details on the effect the rules will have on their businesses.
Bynum conceded that the bureau’s proposed rules allow payday loan rollovers while Mississippi law does not. But the state’s rollover ban is easy to skirt by still allowing borrowers to take out loans from different lenders at the same time, he said.
This practice is snuffed out under the CFPB rules, he noted.
Bynum said the proposed rules have a long way to go before adoption.
“This is only the beginning of the process,” he said. “We are a long way from what will ultimately be law.”
Strong objections to new restrictions and the ability to repay provisions can be expected from the check cashing and payday loan industry. Jamie Fulmer, senior VP for public affairs at nationwide payday lender Cash America, accused the reformers of initiating an “ideological crusade to eliminate small-dollar, short-term credit products.”
The CFPB, he said, is using flawed research in maintaining that payday borrowers become chronic users of the loans and average eight to 10 loans a year.
“People who have no need for payday loans too often lead the charge to eliminate them,” Fulmer said in a recent email.
“American taxpayers – including the 25 million middle-class workers living paycheck-to-paycheck and unable to manage financial shock – don’t want the government to limit their access to credit when they need it.”
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