The Consumer Financial Protection Bureau rule ... applies to short-term (payday and auto title) and longer-term balloon-payment loans.
Baptist leaders praised the final version of a rule, released by the Consumer Financial Protection Bureau (CFPB) on Oct. 5, that seeks to end "debt traps" within the payday loan industry.
Stephen K. Reeves, associate coordinator of partnerships and advocacy at the Cooperative Baptist Fellowship, called it "a momentous step forward in the fight to reign in predatory lending practices nationwide," in an Oct. 5 press release.
CBF is part of Faith for Just Lending, a coalition of faith groups formed in May 2015 working to address predatory lending practices within the payday loan industry.
The coalition released a joint letter addressed to CFPB Director Richard Cordray in May 2016 affirming the bureau's work to end debt traps and calling attention to several key components while the now-released rule was being formulated.
Reeves praised CBF-affiliated churches for being "strong advocates on behalf of and alongside their most financially vulnerable neighbors" and for sending "more than 550 comments to the CFPB calling for a strong rule."
University Heights Baptist Church in Springfield, Missouri, pastored by Danny Chisholm, is one of the CBF churches working to curb predatory lending.
Through its University Hope program, the congregation provides low-interest loans to allow people to pay off high interest payday or auto title loans.
Chisholm told EthicsDaily.com that the CFPB rule is "a positive, encouraging step" enacting a "critical change" in payday lending requirements that "offers common sense guidelines which I've been wanting to see for some time."
Addressing exploitative practices in the payday loan industry is a public policy issue for the Christian Life Commission (CLC) of Texas Baptists (Baptist General Convention of Texas).
Kathryn Freeman, director of public policy at the CLC, described the rule as "a good first step to protecting consumers from some of the abusive practices of the payday lending industry."
The payday loan industry often finds ways around regulatory guidelines, she explained, so "the most effective means of curbing their abusive practices is some sort of rate cap, which is limiting the amount of interest they can charge on a loan."
"We are incredibly grateful for the work that CFPB is doing. We think it is important work," Freeman told EthicsDaily.com. "Our hope is ... that we can continue to work closely with the agency and with our elected officials on coming up with a [lending] model that ensures both borrower and lender success."
The Cooperative Baptist Fellowship of Florida is part of Floridians for Responsible Lending, a coalition working to address exploitative (predatory) lending practicing in the Sunshine State.
Rachel Gunter Shapard, associate coordinator for Cooperative Baptist Fellowship of Florida, called the final rule "a step in the right direction" in an Oct. 5 press release.
The CFPB rule, which was developed over a five-year period, applies to short-term (payday and auto title) and longer-term balloon-payment loans. It will become effective 21 months after publication in the Federal Register.
"Payday loans are typically for small-dollar amounts and are due in full by the borrower's next paycheck, usually two or four weeks. They are expensive, with annual percentage rates of over 300 percent or even higher. ... These loans are heavily marketed to financially vulnerable consumers who often cannot afford to pay back the full balance when it is due," CFPB explained.
The rule sets out several requirements for payday lenders, including:
1. "Reasonable determination" must be made regarding a client's ability to repay their loan.
Lenders must verify a client's income, current debt, housing costs and other living expenses so as to establish a debt-to-income ratio and make it less likely for clients to need to reborrow within 30 days. Giving a new loan to a client who has taken out three short-term or balloon-payment loans within the past 30 days is also prohibited.
2. The number of withdrawal attempts on a client's bank account is limited.
Lenders cannot make more than two consecutive withdrawal attempts on the client's bank account linked to the loan without the client's "new and specific authorization to make further withdrawals from the accounts."
3. Advance notifications before attempting to withdraw funds from a client's bank account are required.
Lenders must send borrowers a notification before an initial withdrawal request is sent to their bank as well as notification of any changes regarding the withdrawal (such as a different date or amount).
The final two provisions seek to address the negative impact of fees resulting from lenders submitting multiple withdrawal attempts (often submitted on the same day).
This was the focus of an April 2016 CFPB report, which revealed that "half of online [payday loan] borrowers are charged an average of $185 in bank penalties ... in addition to any fees the lender might charge for failed debit attempts."
Reeves emphasized, "While this is an important moment, it is by no means the end of the struggle to end debt-trap loan products. ... Payday lenders are notoriously creative in finding ways to avoid new regulations."
A fact sheet on the CFPB rule is available here. The full text of the rule is available here.
Zach Dawes is the managing editor for EthicsDaily.com. You can follow him on Twitter @ZachDawes_Jr.
Editor's note: A free PDF resource sheet on payday loans and predatory lending is available here.