On October 5, 2017, the Consumer Financial Protection Bureau (CFPB) issued its long-awaited small-dollar lending rule. The rule stems from over five years of careful research conducted by the CFPB, which recognized the devastating impact of the predatory lending industry on millions of Americans. Georgia Watch believes the newly issued CFPB rule is critical to Georgians, particularly our lowest income consumers, because it provides protections that shield them from harmful practices that persist in our State.
Georgia Watch supports the CFPB rule, but we are concerned about what might happen next. Congress could repeal the predatory lending rule under the Congressional Review Act with a simple majority vote in both the House and Senate. This worry comes on the heels of the vote to scale back a different CFPB rule that would have restored consumers’ right to band together in court when major financial institutions harm them. That rule was created after years of studying forced arbitration clauses, which favor big business and prevent individuals from getting their day in court. The recent roll back of that newly issued CFPB rule was a blow to consumers and a gift to big banks.
Predatory loans, including payday and car title pawn loans, ensnare borrowers into a cyclical debt trap. When an unexpected expense occurs, a consumer may take out a small loan to make ends meet until their next paycheck. Unfortunately, these loans often come with skyrocketing interest rates—a fact seldom articulated to the borrower. When the next paycheck arrives, borrowers may find themselves able to pay back the loan—but not the exorbitant interest rate attached to it. To pay back the initial emergency loan, a borrower may have to take out an additional loan, often from the same company, and so continues the cycle. This can lead to all sorts of financial consequences for consumers, including loss of their only vehicle, bank penalty fees, and reduced credit scores.
Georgia advocates have fought against the payday loan industry for well over six decades. In 2004, Georgia Watch helped ensure the passage of the Payday Lending Act which capped interest rates on small loans at 60 percent and added criminal and civil penalties for violators, effectively ending payday lending in the State. The vehicle title pawn industry, however, is thriving in Georgia. The 60 percent interest rate cap does not apply to car title loans. Auto title loans can carry an annual interest rate of up to 187.5 percent!
The new CFPB rule contains two important, commonsense borrower protections. The first is an ability-to-repay requirement which obligates lenders to determine whether borrowers can actually afford to repay their loans. The lender must verify the borrowers’ income, check their other loan obligations, and forecast their basic living expenses. If the borrower cannot make the payments, the lender is barred from making the loan.
The new rule also implements a debit attempt cutoff, which prevents lenders from repeatedly accessing the borrower’s checking or prepaid accounts. If the lender has unsuccessfully attempted to debit the borrower twice in a row, the lender is prohibited from making additional debit attempts unless the lender receives new authorization to do so from the borrower. This protects consumers from numerous bank fees for returned payments and insufficient funds.
Georgia Watch strongly supports the CFPB and all of its independent rulemaking and enforcement powers. We believe the new small-dollar lending rule is an important step forward in protecting Georgia consumers, but progress can still be made at the state level. The new CFPB rule affirms that strong state interest rate caps, like our 60 percent cap on small dollar loans, are the best defense against predatory lending. The State of Georgia still has important work to do to reign in the title pawn lending industry and apply interest rate caps across the board.