New CFPB Payday Lending Rule Will Reduce Abuses; State Protections Remain Crucial
A 36% Usury Cap Would Keep Loan Sharks at Bay
BATON ROUGE and NEW ORLEANS — A new rule released today by the Consumer Financial Protection Bureau (CFPB) will reduce the harms of short-term payday lending and car title lending to Louisiana families, but state protections remain crucial to prevent predatory lenders from exploiting loopholes in the rule.
Payday and car title lending costs Louisiana families $241,461,615 per year in abusive fees. The loans drive borrowers into financial distress by trapping them in long-term debt at triple-digit interest rates. Borrowers routinely pay more in fees than the amount they borrow for what is marketed as a quick fix for a cash shortage. Many end up with unpaid bills, overdraft fees, closed bank accounts and even bankruptcy.
“This new rule has the potential to bring common-sense requirements to a payday lending industry that knowingly traps thousands of Louisianans in long-term cycles of debt at 391% annual interest. But Louisiana families still need our state lawmakers to strengthen consumer protections,” said Jan Moller, director of the Louisiana Budget Project. “Left unchecked, payday and car title lending drains over $200 million every year from Louisiana’s economy and often causes bankruptcy, bank account overdrafts and delinquency on other bills. While the CFPB cannot legally cap the interest rate on payday lending – the most effective measure to stop the payday lending debt trap – our state lawmakers can and should cap these loans at 36% APR.”
The CFPB is not legally authorized to cap interest rates, so the new rule protects consumers by requiring lenders to take steps to require affordable loans – loans that borrowers can pay back without taking out another loan in order to cover living expenses.
“The CFPB rule limits payday lenders’ ability to prey on economically vulnerable Louisianans by requiring lenders to consider a borrower’s’ ability to repay and restricting back-to-back loans,” said Dr. Alex Mikulich, a New Orleans-based Catholic theologian, and activist. “This rule will force predatory lenders to shift their business model away from churning loans out one after another and ease the stranglehold payday lenders have on Louisiana’s working poor families.”
The CFPB makes it clear that the rule is a floor for consumer protections, not a ceiling, and that it does not prevent states from enacting stronger laws, such as a rate cap.
Although today’s rule addresses only the ability-to-repay standards for short-term loans and longer-term loans with a balloon payment, the rule does recognize that long-term high-cost loans are also harmful. The CFPB is continuing its work to address those loans too. Payday lenders have a long history of exploiting loopholes where they can find them, and state usury caps prevent this exploitation. A 36% rate cap would ensure that borrowers are protected against the harms of these high-cost loans regardless of whether they are structured as short-term or long-term loans.
The Louisiana Budget Project (LBP) monitors and reports on public policy and how it affects Louisiana’s low- to moderate-income families. We believe that the lives of Louisianans can be improved through profound change in public policy.
Dr. Alex Mikulich, Ph.D. is a New Orleans-based anti-racist Catholic theologian, and activist. He is currently writing “Embracing Racial Intimacy: A Spirituality for Racial Equity” to be published by Orbis Books in 2018.