Merkley, colleagues urge crackdown on ‘predatory’ lenders

As the Consumer Financial Protection Bureau considers new rules to rein in predatory practices in payday and similar types of lending, Sen. Jeff Merkley, D-Ore., and 31 Senate colleagues expressed support Thursday for the agency’s first steps and urged the strongest possible rules to combat the “cascade of devastating financial consequences” the high-priced loans often have on consumers.

In a letter to CFPB Director Richard Cordray, Merkley was joined by Sens. Dick Durbin (D-IL), Chris Coons (D-DE), Tammy Baldwin (D-WI), Richard Blumenthal (D-CT), Cory Booker (D-NJ), Barbara Boxer (D-CA), Sherrod Brown (D-OH), Maria Cantwell (D-WA), Ben Cardin (D-MD), Dianne Feinstein (D-CA), Al Franken (D-MN), Kirsten Gillibrand (D-NY), Martin Heinrich (D-NM), Mazie Hirono (D-HI), Tim Kaine (D-VA), Angus King (I-ME), Amy Klobuchar (D-MN), Patrick Leahy (D-VT), Edward J. Markey (D-MA), Chris Murphy (D-CT), Gary Peters (D-MI), Jack Reed (D-RI), Bernie Sanders (I-VT), Brian Schatz (D-HI), Chuck Schumer (D-NY), Jeanne Shaheen (D-NH), Debbie Stabenow (D-MI), Tom Udall (D-NM), Elizabeth Warren (D-MA), Sheldon Whitehouse (D-RI), and Ron Wyden (D-OR).

The senators wrote:

“We support the CFPB’s initial steps towards releasing a proposed rule and urge you to issue the strongest possible rules to end the damaging effects of predatory lending.

“Small-dollar, short-term loans with astronomical interest rates that pull consumers into a cycle of debt are predatory. These loans have high default rates, including after the borrower has already paid hundreds or thousands of dollars because of triple-digit interest rates. […] Even if consumers do not default on these loans, high interest rates, preauthorized payment methods and aggressive debt collection efforts often cause a cascade of devastating financial consequences that can include lost bank accounts, delinquencies on credit cards and other bills, and bankruptcy.”

The senators urged the CFPB to focus on meaningful ability-to-pay standards for small-dollar loans. Such standards could help crack down on loans with astronomical interest rates and fees that low-income customers are highly unlikely to be able to repay.

Payday loans, which use the borrower’s next paycheck as collateral, often carry annualized interest rates as high as 500%. Such loans are frequently designed to trap borrowers in a predatory cycle of debt, with a 2014 CFPB study finding that four out of five payday loans are rolled over or renewed.

In Oregon, Merkley led the fight as Speaker of the House to throw the predatory payday lenders out of Oregon, passing legislation protecting consumers against abuses by placing an interest rate cap of 36 percent on all consumer finance loans and limiting rollovers of short-term loans.

While Oregon was successful in passing strong rules in 2007, over time, payday lenders have found ways around Oregon’s laws through online payday lending, Merkley said..

The letter is supported by Americans for Financial Reform, the California Reinvestment Coalition, the Center for Responsible Lending, Consumer Action, the Consumer Federation of America, Consumers Union, Mountain State Justice, the NAACP, the National Consumer Law Center, National Fair Housing Alliance, National People’s Action, PICO Network, PIRG, Policy Matters Ohio, the West Virginia Center on Budget and Policy, and the Woodstock Institute.

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Here’s a response issued by Jamie Fulmer, Senior Vice President of Advance America, a leading provider of short-term credit, including payday loans

“Advance America strongly opposes “unfair, deceptive, and abusive acts or practices,” as Sen. Merkley described. However, the Bureau’s proposed rule does not address these concerns. Instead it seeks to eliminate access to well-regulated credit for millions of Americans. Neither the Senators nor the CFPB are willing to answer the fundamental question underlying the proposed rules: what happens to a consumer who walks into a payday loan center and is unable to get a loan to meet an urgent financial need?

“More than two-thirds of middle-income Americans cannot cover a $400 emergency expense, according to the Federal Reserve. Access to a variety of short-term credit options is critically important to help these consumers make ends meet. In fact, borrowers in Senator Merkley’s home state of Oregon have seen firsthand what happens when the government arbitrarily limits their access to credit. In 2010, the state legislature implemented overly burdensome restrictions, resulting in the closure of 75 percent of the state’s short-term lending stores. The following year, consumer complaints about unregulated Internet lenders doubled; nearly 70 percent of such complaints were against unregulated lenders.”

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The full text of the senators’ letter follows below.

Dear Director Cordray:

We write regarding the Consumer Financial Protection Bureau’s (CFPB) efforts to study and address payday lending practices. We support the CFPB’s initial steps towards releasing a proposed rule and urge you to issue the strongest possible rules to end the damaging effects of predatory lending.

Small-dollar, short-term loans with astronomical interest rates that pull consumers into a cycle of debt are predatory. These loans have high default rates, including after the borrower has already paid hundreds or thousands of dollars because of triple-digit interest rates.Notably, the typical borrower of a two-week loan is in debt for more than half the year. In addition, longer term high-cost installment loans with smaller payments than lump-sum payday loans can result in high default or refinancing rates, high rates of bounced payments and other harmful consequences. Even if consumers do not default on these loans, high interest rates, preauthorized payment methods and aggressive debt collection efforts often cause a cascade of devastating financial consequences that can include lost bank accounts, delinquencies on credit cards and other bills, and bankruptcy.

Predatory lenders should not be able to continue unfair, deceptive, and abusive acts or practices that are designed to trap borrowers in a cycle of debt. A CFPB study found that 75 percent of loan fees on payday loans came from consumers with more than 10 transactions over a twelve-month period. This is a business model rooted in preying on individuals and families that have no ability to repay, and the CFPB has a critical opportunity to protect consumers by issuing strong rules. We hope that the Bureau will do so, while also taking into account and respecting states that have strong laws currently in place and building on their efforts to protect consumers from predatory lending.

In finalizing proposed rules, we urge you to focus on meaningful measures to ensure a consumer’s ability to repay. In the outline of the proposals being considered, the CFPB wrote that it “believes that the failure to make an ability-to-repay determination results in many consumers taking out unaffordable loans.” Ability-to-repay is a fundamental element of responsible lending; however, predatory lenders, particularly those with direct access to a consumer’s checking account, have not prioritized this standard. Lending in the absence of an effective ability-to-repay determination, and monitoring of how loans perform in practice, causes substantial harm to consumers. We urge you to give this standard appropriate consideration in the proposed rules.

We appreciate your attention to this issue and hope you will soon issue strong rules to address the predatory lending practices that will only continue to harm consumers without swift action.