WASHINGTON, D.C. – Attorney General Karl A. Racine today led a coalition of 25 states opposing the Trump administration’s efforts to eliminate rules protecting consumers from abusive payday and vehicle title loans. The states filed an official comment letter with the Consumer Financial Protection Bureau (CFPB) opposing the Bureau’s proposed repeal of rules adopted in 2017 to protect consumers from excessive interest rates and other predatory practices that trap consumers in cycles of debt while preserving access to less-risky types of short-term credit. The letter argues that eliminating the 2017 protections, which were set to go into effect in August 2019, would harm consumers, reduce states’ ability to protect their residents from predatory lending, and is inconsistent with the CFPB’s legal obligations to protect consumers from unfair and abusive practices.
“Rolling back consumer protections on high-interest short-term loans will trap low and middle income borrowers in endless cycles of debt,” said AG Racine. “We must continue to stand up against risky and abusive lending practices that hurt consumers.”
Payday loans are high-interest, short-term loans that must be paid in full when the borrower receives their next paycheck. Payday lending can trap lower-income people who do not otherwise have access to consumer credit into endless cycles of debt. According to the Pew Charitable Trusts, the average payday loan borrower earns about $30,000 per year, and about 58 percent have trouble meeting their monthly expenses. The average payday borrower is in debt for nearly half the year because they borrow again to help repay the original loan. The average payday borrower spends $520 per year in fees to repeatedly borrow $375. Vehicle title loans are similar to payday loans, but they also require borrowers to guarantee a loan with their car or truck title. This means that if a borrower defaults, the lender can seize their vehicle.
Payday and vehicle title loans are often marketed to consumers in desperate financial and life circumstances. While the maximum annual interest rate that lenders may charge in the District of Columbia is 24 percent, some unscrupulous fringe lenders attempt to get around the limits set here and in other states and exploit regulatory loopholes to offer predatory loans across the country.
In 2017, the CFPB finalized a rule that requires lenders to determine in advance whether consumers have the ability to repay loans that are due all at once, capped the number of short-term loans lenders can make to the same consumer in a row at three, and preserved access to less-risky short-term loans that allowed consumers to pay off debt over time. While the rule went into effect in early 2018, compliance was delayed to August 19, 2019 to give lenders time to develop systems and policies. Now, less than 18 months after the rule was adopted, the Trump administration is attempting to rescind it. In March, the same coalition of 25 states opposed a separate attempt by the CFPB to further delay implementation of the rule.
The proposed rollback of the 2017 payday lending rule violates the law and harms the states by:
- Allowing lenders to prey on vulnerable consumers: 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.
- Undercutting states’ efforts to protect their residents: In their letter, the states explain 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 gave states additional ways to protect their residents. Additionally, by creating national minimum standards for payday lenders, the rules closed loopholes that lenders previously exploited to get around state laws. If the payday lending rules are rolled back, lenders would have significant opportunities to escape state regulation.
- Acting against the CFPB’s mission to protect consumers: The attorneys general argue that CFPB was established in 2010 to protect consumers from unfair and abusive practices. The agency correctly identified certain payday lending practices as harmful and abusive. Now, the CFPB is going through absurd legal contortions to take the rule back. If the CFPB rescinds a rule implemented to protect consumers, it would be acting inconsistently with its duty and contrary to federal law.
The full text of the letter can be read at: https://oag.dc.gov/sites/default/files/2019-05/CFPB-Payday-Lending-AG-Comment-Letter.pdf
A factsheet summarizing the CFPB’s 2017 payday lending rule is available at: http://files.consumerfinance.gov/f/documents/201710_cfpb_fact-sheet_payday-loans.pdf
The multistate coalition was led by District of Columbia Attorney General Karl A. Racine and New Jersey Attorney General Gurbir Grewal, and includes the states of California, Colorado, Connecticut Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, Virginia, Washington, and Wisconsin.
The comment letter is part of a broader OAG effort to protect District residents from predatory lending. In January, AG Racine led a coalition of 14 states urging the Federal Deposit Insurance Corporation (FDIC) to protect borrowers from abusive lending practices as part of proposed guidance for banks offering short-term, small-dollar loans. In late 2018, he also led a 15-state coalition in a friend-of-the-court brief filed in a case in which payday lenders attempted to evade state laws by contracting with Native American tribes to offer loans.