Opponents of the imminent move toward enhanced regulation of payday lenders claim the Consumer Financial Protection Bureau (CFPB) will cut off an important source of credit for low-income Americans.
“Put simply when the electricity is cut off, the water is turned off, the car payments are due, and the rent must be paid–poor people cannot go to big banks for a loan,” said Rep. Alcee Hastings (D-Fla.) in March.
But according to a report published early Wednesday morning by the CFPB, many payday loan customers end up without a car at all. One-in-five Americans who get short-term loans using their vehicle as collateral end up losing it.
“Our study delivers clear evidence of the dangers auto title loans pose for consumers,” CFPB Director Richard Cordray said in a prepared statement. The investigation looked at 3.5 million records.
The study also found that four-in-five Americans who take out short-term auto title loans end up needing to renew their credit lines seven-times.
“Instead of repaying their loan with a single payment when it is due, most borrowers wind up mired in debt for most of the year,” Cordray also noted. “The collateral damage can be especially severe for borrowers who have their car or truck seized, costing them ready access to their job or the doctor’s office.”
The CFPB is expected to finalize its payday lending rule in the next few weeks. In March, Cordray said it would “seek to eliminate predatory practices that embroil many consumers in a debt trap.”
Many industry-tied Florida Democrats like Hastings and Reps. Debbie Wasserman-Schultz (D-Fla.) and Patrick Murphy (D-Fla.) remain opposed. As an alternative, they’re seeking to pass legislation that would exempt states from the CFPB rules if they adopt a regulatory regime like the one Florida recently implemented—a system that still allows for annualized interest rates at above 300 percent.
Although supporters of a light-touch approach to short-term loans claim the rule could dramatically cut off access to credit, fifteen states have established interest rate caps in recent years with little fanfare.
