Spiral of Debt? Feds want more controls over payday, title lending

HARLINGEN — The neon lights are everywhere.

Payday loans, car title loans, prestamos. Cash available immediately.

Little lenders are big business in the Rio Grande Valley, which is home to around 300 of the 2,200 licensed small lenders in Texas.

If the federal government has its way, and apparently it will, some financial experts say 85 percent of these businesses and the thousands of people they employ could soon be out of work.

Do feds believe people can’t handle money?

That’s a sore subject with me. Regulators talk about my customers like they’re not financially sophisticated, and after 50 years in the business, my customers are as sophisticated financially as anybody,” Lee Moore of Loan Express.

The Consumer Financial Protection Bureau, created by the Obama administration in 2010, has issued proposed regulations that will sharply limit how payday loan companies operate.

Officials say the regulations are intended to stop what the agency sees as a hamster wheel of debt, with annualized loan percentages averaging around 390 percent if borrowers can’t pay on time and they extend their loans.

“Too many borrowers seeking a short-term fix are saddled with loans they cannot afford and sink into long-term debt,” CFPB Director Richard Cordray said last month in announcing the proposed rules.

When talking little loans, there are several kinds

A payday loan means a borrower has taken an advance on a paycheck, and these usually are repaid within two weeks.

A car title loan means the borrower’s vehicle is put up as collateral, often allowing someone with less than perfect credit access to a bigger loan than would otherwise be available.

Another type of loan is the installment loan, where a borrower pays each month for a set period of time, with no balloon payment at the end.

Highlights of new payday lender rules

FULL-PAYMENT TEST: Under the proposed full-payment test, lenders would be required to determine whether the borrower can afford the full amount of each payment when it’s due and still meet basic living expenses and major financial obligations.

PRINCIPAL PAYOFF OPTION FOR CERTAIN SHORT-TERM LOANS: Under the proposal, consumers could borrow a short-term loan up to $500 without the full-payment test as part of the principal payoff option that is directly structured to keep consumers from being trapped in debt. Lenders would be barred from taking an auto title as collateral. A lender could offer a borrower up to two extensions of the loan, but only if the borrower pays off at least one-third of the principal with each extension.

LESS RISKY LONGER-TERM LENDING OPTIONS: The proposal would also permit lenders to offer two longer-term loan options with more flexible underwriting, but only if they pose less risk by adhering to certain restrictions. The first option would be offering loans where interest rates are capped at 28 percent and the application fee is no more than $20. The other option would be offering loans that are payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36 percent or less, not including a reasonable origination fee, so long as the lender’s projected default rate on these loans is 5 percent or less.

DEBIT ATTEMPT CUTOFF: Under the proposal, lenders would have to give consumers written notice before attempting to debit the consumer’s account to collect payment for any loan covered by the proposed rule. After two straight unsuccessful attempts, the lender would be prohibited from debiting the account again unless the lender gets a new and specific authorization from the borrower.

Source: Consumer Financial Protection Bureau