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The CFPB’s Upcoming Payday Lending Rule: What to Look For and What It Means

May 18, 2016
Payday Loans
Research

The Consumer Financial Protection Bureau (CFPB) is widely expected to soon propose a new national rule that addresses payday and car title lending. If strong enough, the rule has the potential to rein in the worst abuses of these kinds of high-cost loans, which carry triple-digit interest rates. Payday lenders are pushing for loopholes in the rule that would make it look like they were making changes but in fact would allow them to continue business as usual.

What Products Will The Rule Cover?

The CFPB’s 2015 preliminary outline offered a glimpse into what to expect from the proposed rule. The rule is likely to cover two major categories of loans, which carry average costs exceeding 300% APR:

  • Payday loans, meaning that the lender takes payment directly from the borrower’s bank account on the borrower’s payday. These include:
    • Short-term payday loans (defined as loans 45 days or less): These are typically due in full on the borrower’s next payday. Fourteen states plus the District of Columbia prohibit these loans by enforcing rate caps of about 36% annually.
    • Long-term payday loans (defined as loans longer than 45 days): These also carry triple-digit interest rates and carry terms anywhere from 46 days to years. In important ways, the longer loan term makes these loans more harmful than short-term loans, not less.
  • Car title loans, meaning that the lender takes access to a borrower’s car title as collateral and can threaten repossession of the car to coerce payment. Like payday loans, these loans can be structured as short-term or long-term. While these loans are illegal in a majority of states, there is a significant car title loan presence in 23 states.

* Long-term loans costing less than 36% fee-inclusive APR are excluded from the preliminary proposal.