Here's a .pdf of the letter (below) KEJC submitted to the CFPB regarding its proposed rollback of regulations governing payday lenders.
Dear Bureau of Consumer Financial Protection:
I am writing as Senior Litigation and Advocacy Counsel of the Kentucky Equal Justice Center in response to the CFPB’s proposal to rescind the 2017 Final Rule governing Payday, Vehicle Title, and Certain High-Cost Installment Loans.
In Kentucky, almost 200,000 Kentuckians pay up to 391% annualized interest each year for short-term payday loans. While some consumers only use a payday loan once, many more get caught in a debt trap: unable to pay off the loan and its exorbitant fees and forced to renew the loan (for additional fees). Following this debt trap to its logical conclusion, it shouldn’t surprise anyone to learn that more than 6,000 Kentuckians take out over 30 payday loans a year.
Consumer protection and advocacy is at the core of the work the Kentucky Equal Justice Center does on behalf of underpaid and financially vulnerable Kentuckians. We urge the CFPB to adopt the modest consumer protections in the rule as promulgated rather than rescind the rule.
The payday lending rule promulgated in 2017 was the result of more than five years of study by the CFPB, including extensive comments from scholars, economists, consumers, consumer advocates, and payday industry groups. The rule requires that payday lenders engage in an “ability to repay” analysis before lending money to customers.
If we are going to continue to have payday lending in this country (many states have outlawed payday lending or capped the annual interest and fees these businesses can charge at a still-usurious 36%), the promulgated rule is a necessary compromise between consumer protection and the payday lending industry’s interest in making as much money as possible on the backs of poor, desperate Kentuckians.
Now, however, the CFPB intends to repeal the rule. This would continue to expose consumers to financial products that they are unable to repay, spiraling borrowers into a revolving debt trap, extracting from them every two weeks exorbitant fees for renewing the loan for another two weeks.
I want to be clear: this rule—requiring payday lenders to determine a borrower’s ability to repay a payday loan—is the absolute least the CFPB could do to protect consumers from payday loans. Well, let me correct myself: repealing this rule (as the CFPB is now seeking to do) is the absolute least the CFPB could do to protect consumers. But, other countries are imposing much higher standards on their lenders than the “ability to repay” standard required by the CFPB’s payday lending rule.
In Australia, lenders are now required to show the “suitability” of a particular loan for a particular borrower. To overcome the presumption that a credit product is unsuitable, the lender must show that the product “meets the consumer’s requirements and objectives, and the consumer has the capacity to repay the loan without experiencing substantial hardship.”
Meanwhile, in the United Kingdom, the lending standards are even higher. Lenders must show that a loan product is in the “best interest” of the borrower. Meeting this standard requires lenders to do market research and demonstrate the product’s benefits for the product’s intended customers. When providing advice to a customer, lenders must “ensure that all advice given and action taken by the firm or its agent or its appointed representative:
(a) has regard to the best interests of the customer;
(b) is appropriate to the individual circumstances of the customer; and
(c) is based on a sufficiently full assessment of the financial circumstances of the customer.
The CFPB’s “ability to repay” standard is easier to meet than either the “suitability” standard that protects Australian consumers or the “best interest” standard governing lenders and borrowers in the United Kingdom. And, yet, the new leadership at the CFPB somehow finds this extremely modest consumer protection and extremely low lending standard too onerous to impose on the massively profitable payday lending industry.
(If you want to understand how profitable payday lending is, I have an anecdote for you. Here in Kentucky, we had a moratorium on additional business licenses to engage in payday lending. When that was set to expire in July of this year, I was concerned that we would see an influx of new payday lenders. My concerns were misplaced: the payday lenders lobbied the legislature and got the moratorium extended for another ten years to protect themselves from any new competition. Payday lenders are happy with the status quo because—turns out!—lending people money at an effective interest rate of 391% a year is very profitable.)
Another way of looking at the profitability of payday lending is by looking at the payday lending data in the annual report generated by Veritec, the company that maintains the payday lending database for the Kentucky Department of Financial Institutions. According to the 2018 report (attached), an “‘average borrower’ had a total advance amount of $3,658.57 and total fees of $636.73” in 2018. “Annual Report on Deferred Presentment Activity for 2018”, p. 7. And, the average customer borrowed $345.19 and took out an average of 10.6 payday loans each year. Report, p. 5, 7. And, the average borrower had an outstanding loan with a payday lender for 222.8 days. Report, p. 7.
Hiding just below the surface of Veritec’s presentation of the data is the reality that many Kentuckians who borrowed money from a payday lender borrowed money once and renewed the loan every few weeks (paying additional fees to renew the loan, but not getting any additional money) until they could pay it off—on average—222 days later. In other words, the “average borrower” paid $636.73 in fees to access—on average—$345.19 in cash.
Payday lending is profoundly profitable in Kentucky. Imposing the minimal consumer protections contemplated by the rule the CFPB now hopes to rescind is not asking too much from an industry so skilled at extracting money from Kentucky’s most desperate borrowers.
Thank you for the opportunity to submit comments on the proposed rulemaking. Please do not hesitate to contact me if I can provide further information.
Senior Litigation and Advocacy Counsel
Kentucky Equal Justice Center