Today, the Consumer Financial Protection Bureau released the first details of long-awaited regulations governing payday loans and other small-dollar lines of credit known to thrust consumers into a devastating cycle of debt. While consumer advocates were quick to applaud the Bureau’s work, and those in the financial industry to voice displeasure with aspects of the potential rules, both groups agreed that the coming months will involve more time and effort to craft meaningful protections for both sides of the issue. 

The CFPB’s detailed outline for potential rules governing payday loans, vehicle title loans, deposit advances, and certain high-cost installment and open-ended loans offers two self-appointed approaches – protection and prevention – that aim to promote more reasonable lending for alternative loan products.

The framework provides requirements tailored to apply to either short-term or longer-term loans. However, the underlying ideas are the same: lenders must verify a borrowers’ ability to repay or offer cheaper, more manageable payment options.

In addition to requirements regarding the issuing of alternative loan products, the CFPB’s outline takes aim at payment-collection practices that take money directly from bank accounts in a way that frequently hits the borrower with hefty fees.

Consumer advocates from across the country praised the CFPB for taking the first step to reining in the small-dollar lending industry, while also expressing the need to craft more robust regulations before the rules are finalized.

For starters many advocates, while recognizing the guidelines are still in early stages, point to a fundamental flaw: letting lenders choose how to be regulated.

Liz Ryan Murphy, policy director for National People’s Action, raised concerns about allowing an industry known for its record of abuse and evasion to theoretically govern itself.

“This combined with an option that allows up to three back-to-back loans with triple-digit interest rates and no underwriting standards are loopholes more than large enough for predators to waltz through,” Ryan Murphy said in a statement.

The loopholes she’s referring to can be found in the CFPB’s premise of providing different guidelines for short-term and longer-term loans.

Because the CFPB’s outline would only require lenders of shorter-term loans – those in which full payments are due within 45 days – to provide underwriting assessing a borrower’s ability to pay, the Bureau is essentially giving longer-term lenders the ability to issue lines of credit without always verifying a consumer can repay the debt.

Pew Charitable Trusts points out that some auto title lenders – which typically issue $1,000 longer-term loans with an annual percentage rate of about 300% – might not be required under the proposals to verify a consumers’ ability to repay, despite the fact that research shows this kind of loan represents nearly 50% of a borrower’s gross monthly income, leaving few funds to pay for other expenses.

“The ingredients are there for success if the CFPB closes the balloon-payment loophole,” Nick Bourke, director of small-dollar loans project at The Pew Charitable Trusts says in a statement [PDF]. “Unaffordable balloon payments are harming consumers today, and a strong ability-to-repay rule can fix that.”

The folks at the National Association of Consumer Advocates agree that some areas of the regulation guidelines leave the door wide open for some of the industry’s most egregious lenders.

“We are concerned that the proposal does not go far enough and could create loopholes that would permit some unaffordable high-cost loans to stay in the marketplace,” NACA legislative director Ellen Taverna says in a statement. “While the CFPB rightfully focuses on the importance of lenders evaluating affordability before making a loan, it also must consider other factors such as the amount of default rates and rollovers on the loans.”

While consumer advocates have long pushed for rules that would require lenders to verify a borrower’s income and ability to repay the loan, most see the CFPB’s initial guideline as inadequate unless they are extended to all types of alternative loans.

“This standard should be applied to all of these loans, regardless of the option the lender selects,” Pamela Banks, senior policy counsel for our colleagues at Consumers Union says in a statement. “These reforms would protect consumers against repeat rollovers or refinancing of loans, because that can lead to more fees and costs, trapping consumers in debt and draining their limited resources.”

Although proponents of the alternative loan industry said they welcomed the CFPB’s outline, they maintained that substantial regulation already exist for many payday lenders.

Dennis Shaul, CEO for Community Financial Services Association of America – a trade association representing the payday loan industry – questioned during a conference call on Thursday whether or not the CFPB’s has conducted thorough research in the area of debt-traps or if it simply based the proposals off of narratives.

“The CFPB has seemingly presupposed the outcome of the upcoming federal rule making process on payday loans which is designed to find answers and solutions,” Shaul said. “Instead, it appears regulators are looking for questions to their predetermined answers. I am disappointed by this first effort by the CFPB, but hold out the hope that as we go forward that it will result in a rule that is both for consumer protection and allowing credit so necessary to this sector of the country.”

Fortunately for both consumer advocates and industry groups the rule making process for the CFPB proposal is long, allowing ample time for the recently released guidelines to evolve.

Following today’s publication of the outline of the proposals under consideration, the CFPB will convene a Small Business Review Panel to gather feedback from small lenders.

In addition to the panel, the Bureau will continue seeking input from stakeholders in the lending industry before issuing a proposed rule.

Once the Bureau issues its proposed regulations, the public will be invited to submit written comments which will be carefully considered before final regulations are issued.

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