TRENTON – Attorney General Gurbir S. Grewal today called on the federal Consumer Financial Protection Bureau (CFPB) to abandon its plan to rescind key protections for borrowers who take out payday, vehicle-title, and other short-term, high-cost loans.
Together with Attorney General Karl A. Racine of the District of Columbia, Attorney General Grewal took the lead on comments submitted to the CFPB today on behalf of a group of 25 Attorneys General. The comments oppose repeal of parts of a rule adopted in 2017 that requires lenders to evaluate a borrower’s ability to repay a covered payday, vehicle-title, or other balloon payment loan before extending credit.
The CFPB developed the 2017 payday lending rule after five years of study and analysis that persuasively documented how the payday and vehicle title lending industries abused consumers and trapped them in cycles of debt. Now, by rolling back these protections, the CFPB would once again allow lenders to prey on poor and desperate consumers without restriction.
“The CFPB is proposing to eliminate common sense rules that would protect hard-working New Jersey families from getting caught in a debt trap,” said Attorney General Grewal. “Fortunately, New Jersey has strong laws on the books to shield our residents from some of the worst abuses among payday loan and vehicle-title loan companies. But repealing the federal standards would make it harder for us to protect our residents’ pocketbooks—especially from bad conduct by out-of-state lenders.”
“We are calling on the CFPB to reconsider repealing these standards, which were intended to help prevent millions of people from becoming mired in the cycle of debt each year. Repealing these rules will cause foreseeable harm to individuals and families across the country,” said Acting Director of the Division of Consumer Affairs Paul R. Rodríguez. “There is no adequate reason, factual or legal, for this change. We will continue to work with our partners throughout the state to protect our residents, and encourage the CFPB to work with, rather than against, us in that effort.”
In 2017, the CFPB adopted rules to protect payday borrowers, including the requirement that lenders assess whether the borrower can pay the loan back according to its terms before making the loan. The CFPB found in 2017 that many payday borrowers cannot repay their short-term, high-interest loans according to their terms, and instead end up re-borrowing, often multiple times, and getting further into debt each time.
The CFPB found similar patterns and issues covered borrowers who took out balloon-payment loans by putting their vehicle titles up as collateral.
The agency’s 2017 rules on payday and other loans were adopted to help consumers avoid this problem by requiring that covered lenders either first confirm a borrower’s ability to pay, or make a limited series of up to three loans, each smaller than the last.
A key provision of the 2017 rule states that it is “an unfair and abusive practice” to provide payday, vehicle title and certain other types of high-cost loans without first “reasonably determining that consumers have the ability to repay those loans according to their terms.”
At that time, the CFPB found that such lenders depend on many borrowers being unable to repay the loans according to their terms, causing them to either default or re-borrow, incurring new fees and costs each time. In fact, the CFPB found at the time that 90 percent of “all loan fees” came from “consumers who borrowed seven or more times” and 75 percent came from “consumers who borrowed 10 or more times.”
Earlier this year, the CFPB announced plans to revisit its application of the “unfair” and “abusive” labels, along with certain other components of the 2017 rule, asserting there was not enough evidence to support the agency’s earlier conclusions.
The CFPB also proposed to reinterpret “unfair” and “abusive” practices, making it harder for the agency to protect consumers from other unfair or abusive practices in the future.
The multistate comments submitted today call the CFPB’s plan to eliminate the significant consumer protections adopted in 2017 “deeply flawed as a matter of law and public policy.”
The comments also explain that, in moving to repeal federal rules that help keep borrowers from drowning in debt, the CFPB now “misconstrues its own authority and obligations in a way that will leave consumers exposed” to the same kind of policies that led to the financial crisis a decade ago.
Finally, the comments argue that rescinding the 2017 payday lending rules would make it much harder for states to protect their residents and enforce their own laws.
By declaring certain payday lending practices unfair and abusive, the 2017 rules give states additional ways to protect their residents, the comments note.
Additionally, by creating national minimum standards for payday lenders, the rules close loopholes that lenders previously exploited to get around state laws. If the payday lending rules are rolled back, the comments contend, lenders will have significant opportunities to escape state regulation.