WASHINGTON – Hilary Shelton, the director of the NAACP’s Washington Bureau, welcomed the Consumer Financial Protection Bureau’s proposal to crack down on payday lenders and encouraged low-income Americans to explore other options for short-term small-dollar loans like pawn shops.
The CFPB’s proposed rule also covers deposit advance products, auto title loans and certain types of “high-cost installment” loans. The proposal requires the lenders to follow certain guidelines to determine whether or not the borrowers have the “ability to repay” the loan.
“The Consumer Bureau is proposing strong protections aimed at ending payday debt traps. Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” CFPB Director Richard Cordray said. “It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey. By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail.”
According to the CFPB’s research, the majority of payday loans are $500 or less. PJM asked Shelton if he is concerned that the CFPB’s action could make it harder for low-income Americans to get small-dollar loans.
“The only thing these payday loans end up doing — I call them payday loans because they are quite predatory — is actually locking people into debt traps,” he said on a conference call with Mike Calhoun, president of the Center for Responsible Lending, and Rev. Willie Gable, chairman of the Faith and Credit Roundtable.
“The short of it is it would certainly limit the number of access to predatory loans that are debt trapping, but in essence it also pushes people to look at alternatives,” he added.
Shelton suggested that a pawn shop would be better than dealing with payday lenders.
“If you take something and leave it at the pawn shop they give you the money. You pay a small fee but it stays that way until you come back and retrieve it. It’s quite different,” he said.
Shelton also encouraged Americans to look into small-dollar loans offered by federally insured credit unions.
“Some make short-term loans available that are not nearly as predatory or costly as these, so the idea is to push us into the options that are there,” he said.
Shelton said low credit scores typically do not impact access to short-term loans for low-income individuals.
“The issue for most people who take these loans out has to do with them being convenient, quick and they are not thinking about just what that $45 or $55 — depending on who the payday lender is — ends up costing them if they have to keep resetting that loan at the end,” he said.
The Credit Union National Association (CUNA) has analyzed the 1,549-page proposal and highlighted some concerns, including new disclosures and Automated Clearing House (ACH) requirements for non-exempt loans as well as “new reporting requirements for covered loans not meeting an exception to the ability-to-repay requirements.”
In 2010, President Obama signed the Dodd-Frank Wall Street Reform Act, which formed the CFPB. Obama appointed Sen. Elizabeth Warren (D-Mass.), who advocated for the creation of the agency, to launch the CFPB’s operations by recruiting its employees.