What’s the best way to protect people from predatory lending? One federal agency has a new proposal, but it’s getting mixed reviews — even among people who agree that something needs to be done.
Here in Virginia, car-title lenders offer loans at more than 200% interest and often trap borrowers in a cycle of debt. In the last four years, the number of cars that have been repossessed has increased 144%. And the number of people missing monthly payments has increased 273%. So what’s the best way for the government to respond? One approach would be to limit the monthly installments to five percent of a person’s income.
“Looking at somebody’s income alone is not enough to determine whether or not an additional loan payment would be affordable."
That’s Diane Standaert at the Center for Responsible Lending. Earlier this year, she and others were pressing the newly created Consumer Financial Protection Bureau to abandon the idea that limiting installment payments to 5% of a person’s monthly income was a good idea.
“The CFPB’s own data found that loans under that threshold still had incredibly high default rates, ranging between 28 and 40 percent default."
She eventually won that argument, and the bureau backed down. Instead it adopted a new underwriting standard, which forced lenders to prove that borrowers can pay the loans before they're issued. Standard says that’s a far better idea than the 5% rule.
“Having a product fail one out of three times is not a suitable safety standard for electronics or cars or appliances and it’s not suitable for high-cost loans either."
Not so fast, say supporters of the five percent rule. They would like to see the Consumer Financial Protection Bureau reinstate that part of the rule when a final version is implemented next year. They say proving an individual can pay back a loan won’t work and may even be counter- productive.
“The underwriting requirement will prevent banks and credit unions from entering the market."
That’s Alex Horowitz at the Pew Charitable Trusts.
“In order to enter the market, they need to use clear, straightforward standards that allow for low-cost origination, and that would enable them to make loans that cost six to eight times less than payday loans today."
He says limiting the monthly installments on car-title loans and payday loans to 5% of a person’s monthly income will force lenders to provide affordable loans.
“Under a five percent standard, banks and credit unions could enter the small-loan market at scale and provide small loans at prices six to eight times lower than payday lenders."
Jay Speer at the Virginia Poverty Law Center says he thinks the 5% rule is probably a better idea than the underwriting rule.
"I kinda like that idea. Some other people don’t. But I kinda like that idea because it does set a sort of bright line rule that’s easier to follow and also easier to enforce."
But Tom Miller at George Mason University’s conservative Mercatus Center says he’s not sure is a rule is needed at all.
“The borrowers have had a history of not being able to pay loans back and having a legal, regulated source of loans is certainly preferred to not having that source of loan."
For now, the Consumer Financial Protection Bureau is still taking comment on the underwriting rule, the 5% rule and even the need for a rule at all. That comment period will end in the next few months, and then the bureau is expected to issue a final rule next year.