Calif. Attorney General Supports Crackdown On 'Abusive Payday Loan Vendors'

SACRAMENTO, CA — California Attorney General Xavier Becerra pledged his support this week for new federal regulations concerning payday loans and the businesses that offer them, saying the Consumer Financial Protection Bureau’s new Payday Lending Rule will prevent “the worst harms associated with short-term payday lending.”

“Sadly, many of these businesses make money by preying on the most vulnerable – hardworking men and women, families with young children, seniors, and people with disabilities,” Becerra said in an Oct. 5 statement.

Becerra pointed out that last year, according to California’s Department of Business Oversight, borrowers in the state were charged an average annual interest rate of 372 percent on payday loans and paid more than $458 million in fees, with 75 percent of this amount coming from hardworking people who took out seven or more loans.

The federal Consumer Financial Protection Bureau on Oct. 5 announced that it had finalized a rule “aimed at stopping payday debt traps by requiring lenders to determine upfront whether people can afford to repay their loans.”

“These strong, common-sense protections cover loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments,” the CFPB said in a statement. “The Bureau found that many people who take out these loans end up repeatedly paying expensive charges to roll over or refinance the same debt. The rule also curtails lenders’ repeated attempts to debit payments from a borrower’s bank account, a practice that racks up fees and can lead to account closure.”

From the CFPB’s website, the specific protections under the rule include:

Full-payment test: Lenders are required to determine whether the borrower can afford the loan payments and still meet basic living expenses and major financial obligations. For payday and auto title loans that are due in one lump sum, full payment means being able to afford to pay the total loan amount, plus fees and finance charges within two weeks or a month. For longer-term loans with a balloon payment, full payment means being able to afford the payments in the month with the highest total payments on the loan. The rule also caps the number of loans that can be made in quick succession at three.

Principal-payoff option for certain short-term loans: Consumers may take out a short-term loan of up to $500 without the full-payment test if it is structured to allow the borrower to get out of debt more gradually. Under this option, consumers may take out one loan that meets the restrictions and pay it off in full. For those needing more time to repay, lenders may offer up to two extensions, but only if the borrower pays off at least one-third of the original principal each time. To prevent debt traps, these loans cannot be offered to borrowers with recent or outstanding short-term or balloon-payment loans. Further, lenders cannot make more than three such loans in quick succession, and they cannot make loans under this option if the consumer has already had more than six short-term loans or been in debt on short-term loans for more than 90 days over a rolling 12-month period. The principal-payoff option is not available for loans for which the lender takes an auto title as collateral.

Less risky loan options: Loans that pose less risk to consumers do not require the full-payment test or the principal-payoff option. This includes loans made by a lender who makes 2,500 or fewer covered short-term or balloon-payment loans per year and derives no more than 10 percent of its revenue from such loans. These are usually small personal loans made by community banks or credit unions to existing customers or members. In addition, the rule does not cover loans that generally meet the parameters of “payday alternative loans” authorized by the National Credit Union Administration. These are low-cost loans which cannot have a balloon payment with strict limitations on the number of loans that can be made over six months. The rule also excludes from coverage certain no-cost advances and advances of earned wages made under wage-advance programs offered by employers or their business partners.

Debit attempt cutoff: The rule also includes a debit attempt cutoff that applies to short-term loans, balloon-payment loans, and longer-term loans with an annual percentage rate over 36 percent that includes authorization for the lender to access the borrower’s checking or prepaid account. After two straight unsuccessful attempts, the lender cannot debit the account again unless the lender gets a new authorization from the borrower. The lender must give consumers written notice before making a debit attempt at an irregular interval or amount. These protections will give consumers a chance to dispute any unauthorized or erroneous debit attempts, and to arrange to cover unanticipated payments that are due. This should mean fewer consumers being debited for payments they did not authorize or anticipate, or charged multiplying fees for returned payments and insufficient funds.

Not everyone is happy about the new regulations, which will take effect in July 2019.

Dennis Shaul, CEO of the Community Financial Services Association of America — established in 1999 as the national organization for small dollar, short-term lending or payday advances — called the rule “out of touch” and that it ignored consumers who had sent in comments on the matter.

“This federal small-dollar lending rule is a tremendous blow to the more than one million Americans who spoke out against it during last year’s comment period,” Shaul said. “Millions of American consumers use small-dollar loans to manage budget shortfalls or unexpected expenses. The CFPB’s misguided rule will only serve to cut off their access to vital credit when they need it the most. The rule is not only misguided, it’s hideously complex for loans of a few hundred dollars. The final rule is nearly 1,700 pages – more than 300 pages longer than the proposed rule.”

Becerra, however, said he applauds the Consumer Financial Protection Bureau for taking action today “to rein in abusive payday loan vendors.”

“Everyone who works hard for a paycheck deserves the chance to get ahead and basic protections. No one should be trapped in a rigged debt cycle,” Becerra said. “As a Member of Congress, I supported the Dodd-Frank Act and the CFPB's proposed rulemaking on payday lending. As California's Attorney General, I will do everything in my power to protect this Rule and the CFPB."

Photo by Carolyn Kaster/Associated Press