States must step forward as CFPB retreats on predatory lending

Targeting the worst abuses that led to the foreclosure crisis, the Consumer Financial Protection Bureau in 2016 required payday and other lenders to determine whether potential borrowers can afford to pay back their loans.  Now, amid the chaos of the recent government shutdown, comes news that President Trump’s CFPB director intends to encourage predatory lending by scrapping this ability to repay rule.

With Congress gridlocked and legal challenges uncertain, it’s up to states to fill the leadership void – through programs that promote affordable small-dollar loans and protect financially vulnerable consumers.

{mosads}It’s an effort that is much needed. A decade after the Great Recession, millions in America struggle to pay their bills every month.  While unemployment is low by historical standards, wages are largely stagnant and good-paying jobs are hard to come by.

Any financial downturn – a health emergency, a disruption in work, or even a government shutdown – can send consumers into crisis. According to the Federal Reserve, 41 percent of Americans say they cannot cover a $400 emergency expense, or would have to sell something or borrow money to do so. This challenge is far greater in underserved and disadvantaged communities.

That’s why the CFPB’s ability to repay (ATR) rules are so important. They ensure that lenders take reasonable steps — such as verifying income — to determine borrowers’ ability to pay off a loan before extending credit. And they stop abusive practices that can trap consumers in a cycle of debt nearly impossible to escape. Yet, there are some who are fighting to eliminate these rules.  This would be an enormous mistake.

The key to addressing the issue is in state capitols, where legislators across the country are looking for ways to promote responsible lending.

One model worth examining is in California, where the Pilot Program for Responsible Loans ensures consumers can borrow $300 to $7,500 at affordable rates.  Six years into the program, according to the California Department of Business Oversight, the volume of payday lending is down and installment loans from the program are up. The pilot program has strict ability to pay standards, and, as a result, defaults on loans have been low. More than 60 percent of repeat borrowers have improved their credit score by an average of 309 points.  Other states are exploring similar programs.

The time is ripe for legislators and responsible lenders to jointly embrace consumer protections that can be incorporated into law. This begins with verifying a borrower’s ability to repay, but other steps include:

• Disclosing the true cost of a loan, with no hidden fees;
• Eliminating prepayment penalties or compounding interest;
• Reducing interest rates for consumers who qualify for larger loans by making on-time payments; 
• Halting such harmful practices as arbitration clauses and selling debt to collectors before a default;
• Reporting to credit bureaus so borrowers can establish or repair their credit scores;
• Setting minimum payback terms in months, not weeks, and avoiding unaffordable lump sum payments;
• Limiting loan refinancing to borrowers who have paid off most of their original loan;
• Offering other financial products, especially in low-income communities, that help consumers build credit, create savings accounts and move into traditional banking; and
• Lenders should strive for diversity on their management teams and boards to reflect the communities they serve.

The bottom line is this: government and lenders must promote alternatives that help millions of working families, living paycheck to paycheck, build futures with solid credit that qualifies them to buy a home, start a business and finance an education.

This begins with strong ability to repay requirements that will help millions in America avoid loans they simply cannot afford and instead put them on the road to financial security.

James Gutierrez is the Founder and CEO of INSIKT, a technology enabled CDFI (Community Development Financial Institution) providing affordable, credit-building loans to underbanked consumers.  Previously, Gutierrez founded Oportun, a CDFI named by Time as one of the Top 50 Genius Companies in 2018.