April 02, 2015
April 02, 2015
For far too long, financially vulnerable Ohioans have been held captive by the exorbitant fees of payday lenders. Consumers’ cries reached the Statehouse in 2008, and in response lawmakers passed the Ohio Short-term Lending Act and the law was upheld in a ballot initiative by two-thirds of voters. Unfortunately, payday lenders took advantage of loopholes to evade the regulation and registered their businesses under other statutes enabling them to charge interest rates of over 600 percent. Last year, the Ohio Supreme Court ruled that payday lenders can continue to lend under statutes that were designed for other purposes.
It has been challenging to police payday lenders in Ohio, which is why the work of the Consumer Federation Protection Bureau is so important. The mission of the CFPB is to make markets for consumer financial products and services work for Americans. Last Thursday, CFPB Director Richard Cordray released the agency’s initial proposal for regulation. The proposal focused on two types of loans: 1) Short-term loans of 45 days or less; and 2) Long-term loans that allow the lender direct access to the borrower’s checking account or holds a borrower’s car title, with an APR greater than 36 percent and a loan term longer than 45 days.
For short-term loans, payday lenders were provided two primary options. The first option, payday lenders would have to determine the customer’s ability to repay the loan and meet current living expenses by verifying their income and evaluating their financial obligations. The second option for loans $500 or less is focused on borrower protections after they receive the loan; requires lenders to only allow two loan rollovers and, with some exceptions, to have a 60-day cooling off period before another loan could be made. It restricts the period of time that a borrower is in debt to 90 days in a 12-month period.
The proposal for long-term loans also gives payday lenders before and after loan options. For the pre-loan option, payday lenders would have to determine the borrower’s ability to repay similar to that of short-term loans. For the post-loan option, payday lenders can either use the criteria from the National Credit Union Association’s “payday alternative loans”, which includes provisions like capping the APR at 28 percent, a $20 maximum application fee and a maximum of two loans for 12 months, or limiting loan payments to a percentage of the borrowers’ income.
The proposal would also regulate the manner in which payday lenders access payments from the borrower. Payday lenders would be required to notify borrowers at least three days before they access their bank account for payment. Payday lenders would also be limited to two attempts on a borrower’s account if the payment efforts fail and then new customer authorization would be required.
We applaud the CFPB’s first stab at regulating payday lenders. The agency’s emphasis on the borrowers’ ability to repay and preventing them from being stuck in the “debt trap” are important provisions in developing a strong rule to protect consumers. However, we believe that these provisions should be mandated together and not be “either/or” propositions. We will continue to work the CFPB to develop a rule that will guard the financial stability of Ohio families.
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