Last week, the Consumer Financial Protection Bureau (CFPB) finalized a historic, nationwide rule that reins in some of the worst abuses of payday and title lenders. The rule aims to put an end to payday debt traps by requiring lenders to determine upfront whether a consumer is able to repay the loan. While this is a significant step forward, there is still much that needs to be done to protect Illinois consumers. Let’s take a look at the new rule and its anticipated impact in Illinois.
A Quick Refresher on Payday & Title Loans
The rule covers two major types of loans:
- Payday loans are loans in which the lender repays itself directly from the consumer’s bank account on their payday. They are typically due in one lump sum.
- Auto title loans are loans in which the lender has the consumer’s car title as collateral – meaning that if the consumer doesn’t repay the loan, the lender can immediately seize and sell the consumer’s car.
Both payday and title loans can be short-term (45 days or less, usually due in one big payment), or longer-term (more than 45 days, and the lender collects payments on an ongoing basis).
The problem with payday and title loans is that they are a deliberate debt trap. Because these loans commonly have more than 300% interest rates, they lock consumers into a debt that they can’t afford to repay. What’s more, these lenders have extraordinary leverage over consumers because of their access to consumers’ bank accounts or their car title. When the lender takes money from a consumer’s bank account, consumers are left without enough money to pay bills or rent, and so they often immediately take out another loan. This is the debt trap, the key to the payday lender business model.
New Protections in the CFPB Rule
There are two buckets of new protections for consumers in the CFPB’s rule. Stick with us – there’s a lot to cover here.
Affordability Requirements: Lenders are required to determine whether the consumer can afford to pay the loan payments and still meet basic living expenses and major financial obligations during the loan, and for 30 days after the biggest payment on the loan. This is called a “full payment test, ” and its goal is to end the debt trap by making sure consumers can repay the loan without re-borrowing.
This part of the rule only applies to short-term payday and title loans (less than 45 days). It also applies to longer-term loans that have a balloon payment (one big payment, usually towards the end of a loan.) There are a couple of other important pieces to know about this part of the rule:
- Mandatory cooling-off period: After three of these short-term loans in quick succession, there is a mandatory 30-day cooling-off period, meaning lenders cannot make additional short-term loans to that consumer for 30 days.
- The principal-payoff option: This option provides a loophole, allowing lenders to skip the full payment test for certain-short term loans that allow borrowers to pay off the debt more gradually.
Payment Protections: The CFPB rule includes new protections to protect consumers’ bank accounts. Lenders have to give written notice before they first attempt to debit a consumer’s account. After two unsuccessful debit attempts, the lender is not allowed to debit the consumer’s account again unless they get new and specific permission from the consumer to do so. This part of the rule applies to a broader array of loans – any loan with an APR over 36% that allows the lender to access the borrower’s checking or prepaid account.
What this Means for Illinois Consumers
While we applaud the CFPB’s rule as an important first step, we are expecting that it will have minimal impact on Illinoisans. Here’s why.
The new payment protections will certainly help Illinois consumers that have taken out payday, title, and installment loans, protecting them from fees that rack up from unsuccessful debit attempts and overdrafting their accounts.
However, the affordability requirements will only impact a portion of Illinoisans who take out small dollar loans, since this part of the rule only applies to loans that are less than 45 days. To understand this, we need to take a look at how Illinois loans are structured. Here in Illinois, we categorize these loans a little differently:
|Type of Loan||Loan Length||Average APR||Number of IL Borrowers||Is it covered by the new affordability requirements?|
|Payday Loans||Up to 45 days||323%||64,968||Yes|
|Installment Payday Loans||112 – 180 days||228%||199,798||No|
|Title Loans||No specific length, but they are generally longer-term and require car title as collateral||189%||74,903||No|
Data from 2015 IDFPR Illinois Trends Report
The affordability requirements will impact anyone who applies for a payday loan, which is great news. But because this this part of the rule only applies to loans that are less than 45 days, it won’t affect the nearly 200,000 Illinoisans who took out installment payday loans or the nearly 75,000 people who took out title loans, because most title loans in Illinois are longer-term loans (the average title loan length is 18.6 months).
More Change is Needed in Illinois
We have a long way to go in Illinois to protect consumers from predatory lending. While we have some state-level protections for payday and payday installment loans, and this new rule provides some additional protections, we still have glaring gaps in our state law regulating these products.
Most importantly, Illinois state law does not regulate title loans. We need affordability requirements (like those in the CFPB rule), maximum loan terms, and most of all, a 36% APR cap. For more information about title lending in Illinois and recommended policy changes, take a look at our 2015 report, No Right Turn.
Join Us in the Fight
Have you or someone you know been negatively impacted by these types of loans? Please join us in the fight for stronger consumer protections by sharing your story. If you or someone you know is willing to talk with us about their experience, please contact Jody Blaylock at email@example.com.