New CFPB Payday Lending Rule Will Reduce Abuses; State Protections Remain Crucial

A 36% Usury Cap Would Keep Loan Sharks at Bay

WashPIRG

Seattle, Washington — A new rule released yesterday by the Consumer Financial Protection Bureau (CFPB) will reduce the harms of short-term payday lending to Washington families, but state protections remain crucial to prevent predatory lenders from exploiting loopholes in the rule.

Payday lending costs Washington families $45 million per year in abusive fees. The loans drive borrowers into financial distress by trapping them in long-term debt at triple-digit interest rates. Borrowers routinely pay more in fees than the amount they borrow for what is marketed as a quick fix for a cash shortage. Many end up with unpaid bills, overdraft fees, closed bank accounts and even bankruptcy.

“Washington legislators have taken initial steps towards curbing the abusive payday lending industry. But our state’s consumers are still pulled into loans with triple-digit annual interest rates,” said Elise Orlick, WashPIRG Director. “The new CFPB rule establishing initial federal protections on short-term loans is a good start, but it is a fishing net holding back loan sharks. The next step is for Washington to establish a 36% interest rate cap to keep the sharks at bay from vulnerable consumers, a step the CFPB cannot take.”

The CFPB is not legally authorized to cap interest rates, so the new rule protects consumers by requiring lenders to make affordable loans – loans that borrowers can pay back without taking out another loan in order to cover living expenses.

The CFPB makes it clear that the rule is a floor for consumer protections, not a ceiling, and that it does not prevent states from enacting stronger laws, such as a rate cap.  

Although yesterday’s rule addresses only the ability-to-repay standards for short-term loans, it does recognize that long-term high-cost loans are also harmful. The CFPB is continuing their work to address those too. Payday lenders have a long history of exploiting loopholes where they can find them, and state usury caps prevent this exploitation. The rate cap also ensures that borrowers are protected against the harms of these high-cost loans regardless of whether they are structured as short-term or long-term loans.

The full CFPB rule can be found here: https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/payday-vehicle-title-and-certain-high-cost-installment-loans/

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WashPIRG is a non-partisan, non-profit consumer organization that stands up to powerful interests whenever they threaten our health and safety, our financial security, or our right to fully participate in our democratic society. On the web at www.washpirg.org.