Have you ever heard the phrase "send in the cavalry?" It's a colloquialism, but historically its a military term for the regiment of an army that fights on horseback. The cavalry historically was the most easily mobilized unit of an army and men fighting on horseback were at a greater advantage than those fighting on foot. For one they had greater height and speed than their opponents on the ground and the improved mobility helped them outflank and overpower their opponents more easily. In the movies, the moment the cavalry arrives is usually the moment the enemy is overpowered and the battle ends for the good guys.
Well, this week the federal government acting through the Consumer Finance and Protection Bureau (CFPB) swooped in like the cavalry in the battle to regulate payday and auto title lenders. We've covered the problems with payday and auto title lenders on this blog before. These are the supposedly short-term loans that end up trapping the poor and the financially fragile in an unending cycle of debt. An industry that has made billions of dollars in fees when their customers inevitability cannot pay the loans back in the initial term and who on average spend 200 days in debt.
The CLC and many others have valiantly been waging war against the payday lenders in Texas. We have worked diligently over the last several sessions to get statewide reform of this industry. Our efforts at the Legislature have not been successful, but with CFPB's actions this week the tide may be turning.
Last week, the CFPB issued proposed rules that would stop the debt trap by requiring lenders to make sure consumers can actually repay their loans. The proposed rules would cover both short and long-term credit products such as payday loans, auto-title loans, high-cost installment loans, and open lines of credit. The proposed rules focus on two different approaches -- prevention and protection. Lenders could choose which set of proposed rules to follow.
The prevention approach for short-term loans would require loan companies to assess the borrower's ability to repay given their income, other major financial obligations, and borrowing history. It would also require a 60-day cooling off period between loans. The consumer could not have any other outstanding loans with any lender. It requires that the lender verify the borrower's financial situation has improved before making a second or third loan within a two month window. Finally, after three loans in a row, all lenders would be prohibited from making a new short-term loan within 60 days.
The protection approach for short-term loans would limit the number of loans a borrower can take out in a row and require lenders to provide affordable repayment options. The loan could not exceed $500, last longer than 45 days, carry more than one finance charge, or require the consumer's car as collateral. The borrower could not have any outstanding loans with any other lender. The number of rollovers would be capped at two followed by a mandatory 60-day cooling off period. The second and third consecutive loans would be permitted only if the lender offers an affordable repayment plan. Finally, the consumer could not be in debt more than 90 days in a 12-month period. To read more, about the CFPB proposed rules visit: www.consumerfinance.gov.
While the CFPB certainly is the cavalry in our long war against usury in Texas, these proposed rules are one step in a very long process. In fact, steps are being taken in Congress at this very moment to weaken the CFPB and its ability to make rules like the one proposed for payday and auto title lenders. As any general knows, foot soldiers play an important role in any military strategy. So while, the cavalry has indeed arrived, we still have work to do.
While Christians tend to be some of the most personally generous people, they too often sit on the sidelines when it comes to systemic efforts to challenge injustice. The CFPB-proposed rules will do what we can not do personally and while providing financial education to the financially vulnerable is important, it is not enough to stop the debt trap that has ensnared many of our most needy neighbors. Everyone has a part to play in the battle to end the financial exploitation of the poor. The CFPB is attempting to play its part by requiring payday and auto title lenders to make affordable loans, the CLC will be working to bolster those efforts, and we hope you will join us.
Please consider reaching out to your Congress person and telling them that you oppose any effort to weaken or eradicate the CFPB. To find out who represents you: http://www.fyi.legis.state.tx.us/Home.aspx