Strengthen the CFPB Payday / Title Loan Rules

Dear Director Cordray,

The Illinois Asset Building Group (IABG) appreciates the opportunity to comment on the proposal by the Consumer Financial Protection Bureau (CFPB) to address some of the worst abuses of the payday lending and auto title lending industries. We greatly appreciate the efforts of the CFPB to provide much needed protections for borrowers.

We continue to see wealth stripped from communities across Illinois by dangerous and abusive payday lenders, consumer installment lenders and auto title lenders. These lenders contribute to the financial insecurity of Illinois families and communities. According to the Illinois Department of Financial and Professional Regulation (IDFPR), between February 2006 through December 2015 1,156,973 consumers took out 7,470,995 small consumer loans, or an average of 6.2 loans per consumer. The average annual income of these borrowers was $30,521 per year.

The Debt Trap in Illinois – Cynthia’s Story

Often marketed as a way to weather a financial storm or to make it to the next paycheck, predatory loans trap people in a cycle of debt that can take years to recover from. We have seen this destructive trap countless times with Illinois residents. One of these residents trying to survive the debt trap is Cynthia Cunningham.

Cynthia lives in the small town of Tilton, Illinois. She used to work for the U.S. Department of Veterans Affairs, but she is now retired and lives on a fixed income of $1260 a month in Social Security benefits. When she was 60, her husband passed away. A couple of years later she developed a chronic health condition, increasing the cost of her medical expenses. After years of living on a fixed income, she got behind on her health insurance payments, and it was in danger of being cancelled.

When she developed a condition that required her to get a heart stent, she needed to pay $900 to ensure that her health insurance was not cancelled, and to allow her to have the procedure. She tried to take out a loan from her bank, but they weren’t offering any small dollar loans. Passing two or three auto title lenders on her drive every day, she decided to take out a title loan to pay for her health insurance. She took out a loan for $895, using the title of an old but cherished car – it was one of the last gifts from her husband before he died. However, the loan has an interest rate of 200%. Over the next two years, she will pay back $152.95 every month. This is a total of $3,670.80 for a $895 loan, equivalent to nearly 3 months of her income. Now, the title loan payment is one of the first bills she pays every month, overstretching an already tight budget. Some weeks, she isn’t able to afford enough food, and relies on friends to bring her meals.

The payday and title loan industry is making a massive profit off the backs of hardworking Americans. Families and communities across this country, including Cynthia’s, need strong rules from the CFPB. While we commend the CFPB for taking this important step in regulating the industry, we believe that the rules can and should be strengthened in order to make the loans safer and less costly.

We believe the following recommended changes would insure that lenders do not exploit the loopholes in the proposed rules and continue to use abusive lending practices:

1. Strengthen Ability-to-Repay: All loans should be required to meet the ability-to-repay standards set in the proposed rules. As we have seen in our own state and in other states (Ohio being one of the worst examples), payday and title lenders will exploit any loophole. A strong ATR rule will ensure that borrowers do not find themselves choosing between food and keeping their lights on, because an exorbitant amount of their income goes towards their loan payment. We recommend that the CFPB remove the exceptions to the ability-to-repay rule.

2. Universal Default Rate: Payday and auto title loans are not similar to other types of lenders that may have different underwriting standards. Therefore, the CFPB should not compare their default rate to other lenders when determining if they are adhering to the ability-to-repay standard. Instead, we recommend that the CFPB set a universal default rate of 10%. Lenders that exceed the 10% default rate will be subject to increased scrutiny by the CFPB.

3. Increase Time Between Loans: Families are suffocating from debt. On average, each American household has a little over $90,000 in debt. Numerous high-interest loans put too much strain on a household budget. A longer cooling off period between loans will provide households with some breathing room. We recommend that the CFPB extend the “cooling off” period between loans from 30 days to 60 days.

4. Curb Long Loan Terms: Over the last 9 years we have seen an increase in the length of a loan’s terms. This means that borrowers are paying back more over a longer period of time – extending the period of holding high-cost debt. We recommend that the CFPB curb lengthy loan periods by limiting the length of all loans.

5. Protect Bank Accounts: We commend the CFPB for proposing rules that would stop a lender’s unfettered access to a borrower’s bank account by limiting automatic payment collection efforts to two withdrawals without the borrower’s permission and notification. We often see borrowers subject to expensive overdraft fees due to a lender’s numerous attempts to access their account. We ask that this provision is not weakened in the CFPB’s final rule.

6. Support Alternative Safe Small-Dollar Loans: As we saw with Cynthia’s experience, she could not find a small dollar loan at banks in her community. Consumers need other, safer, options. We recommend that the CFPB should explore opportunities to invest in and encourage the creation of alternative loan products that are affordable and meet the needs of low- and moderate-income households.

We greatly support the CFPB’s efforts to curb this abusive lending industry. Thank you for your review of our comments to the proposed rules. We are happy to answer any questions. You can contact Lucy Mullany, Senior Policy Manager of Financial Empowerment Policy at Heartland Alliance and IABG, at 312-498-8614 or lmullany@heartlandalliance.org.

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