The Consumer Financial Protection Bureau (CFPB) has issued a proposed framework for regulating payday and auto title loans, the first step toward precedent-setting federal rule-making to address the most harmful aspects of high-cost, small-dollar loans. The proposal would create two types of “covered” loans, short and long term, to establish a better market based on affordable payments and would attempt to steer the market toward loans that better align borrowers’ and lenders’ interests. The complexity of the CFPB’s approach, however, creates several risks for consumers. In this issue brief, Pew provides an analysis of the CFPB’s proposal and offers policy recommendations to improve the proposal’s ability to address the problems in this market.
Based on this in-depth analysis of the CFPB proposal, Pew recommends the following modifications in order to ensure a safer small-dollar loan market while maintaining access to credit for consumers:
Make dangerous loans safer
- Limit loan duration or limit how long lenders may hold a preferred repayment position. Protect against unreasonable loan durations; constrain lenders’ unique and potentially harmful power to collect payment before other bills are paid by accessing borrowers’ bank accounts or repossessing their vehicles.
- Eliminate the short-term alternative loan, or, if it is kept, significantly increase requirements for offering it. Protect against deceptive or unaffordable loan structures.
- Require all fees to be pro rata refundable for loans that are refinanced or repaid early. Mitigate the risk of loan flipping and the resulting harm.
Make safe loans easier to provide
- Remove the two-loan limit on the longer-term alternative loans. Encourage customers to borrow only what they need and to prepay when possible.
- Make data reporting and verification for longer-term alternative loans easier. Encourage responsible lenders to offer safer, lower-cost products.