Arkansas Attorney General Leslie Rutledge is calling on the Consumer Financial Protection Bureau (CFPB) to convene a conference of the states to discuss the framework and ideas contained a proposal by the Obama administration that federal officials say would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans.
Rutledge, however, said the proposals contained in a March 26, 2015 outline of potential new federal standard for – and limitations on – credit lines, installment loans, deposit advances, automobile-title secured loans and payday loans was another case of the administration imposing federal regulations over states’ own interests.
“The outline from the (CFPB) ignores the interests of the states and seeks to impose a one-size-fits-all federal approach,” Attorney General Rutledge said in a recent letter to CSFB Director Richard Cordray.
“If the Bureau moves ahead with its proposal, I fear that it will negate reasonable policies that Arkansas and other states currently have in place to protect consumers and at the same time allow the free market to provide needed services like credit lending,” Rutledge said. “I am calling on Director Cordray, a former state attorney general, to recognize the need to hear from the states on these issues and to convene a conference as soon as possible before taking any further action.”
In her letter, Rutledge said such a conference would help demonstrate that Cordray’s commitment to cooperative federalism is real. It would also provide an opportunity to discuss the various state regulatory and enforcement systems, what the states have learned from their own longstanding efforts to protect consumers from predatory, dishonest and sharp lending practices and how unnecessary federal-state conflict might be avoided, the Arkansas AG said.
Rutledge notes in the letter that the potential rule will conflict with, constrict and otherwise unnecessarily interfere with existing Arkansas consumer protection laws, lending standards, licensing systems and regulatory enforcement mechanisms.
CFPB GOES AFTER PAYDAY LOAN INDUSTRY
According to CFPB, the proposals under consideration provide two approaches to eliminating debt traps – prevention and protection. Under the prevention requirements, lenders would have to determine at the outset of each loan that the consumer is not taking on unaffordable debt.
Under the protection requirements, lenders would have to comply with various restrictions designed to ensure that consumers can affordably repay their debt. Lenders could choose which set of requirements to follow.
The proposals under consideration would also cover short-term credit products that require consumers to pay back the loan in full within 45 days, such as payday loans, deposit advance products, certain open-end lines of credit, and some vehicle title loans.
Over the past month, CFPB has amped up its attack campaign on the payday lending and vehicle title loan industry. On Wednesday (May 18), CFPB issued a report finding that one-in-five borrowers who take out a single-payment auto title loan have their car or truck seized by their lender for failing to repay their debt. According to the CFPB’s research, more than four-in-five of these loans are renewed the day they are due because borrowers cannot afford to repay them with a single payment.
Additionally, Cordray said, more than two-thirds of auto title loan business comes from borrowers who wind up taking out seven or more consecutive loans and are stuck in debt for most of the year.
“Our study delivers clear evidence of the dangers auto title loans pose for consumers,” Cordray said in a statement. “Instead of repaying their loan with a single payment when it is due, most borrowers wind up mired in debt for most of the year. The collateral damage can be especially severe for borrowers who have their car or truck seized, costing them ready access to their job or the doctor’s office.”
The newly released report examines nearly 3.5 million single-payment auto title loan records from nonbank lenders from 2010 through 2013. It follows previous CFPB studies of payday loans and deposit advance products, which agency officials said are among the most comprehensive analyses ever made of these products.
The CFPB is considering proposals to put an end to payday debt traps by requiring lenders to take steps to determine whether borrowers can repay their loan and still meet other financial obligations. The federal watchdog agency is expected to unveil its new rules within the next few weeks, officials said.
ARKANSAS HISTORY WITH PAYDAY LOAN INDUSTRY
In 2008, the Arkansas Supreme Court ruled that the Check Cashers Act violated the state constitution because it allowed payday lenders to charge exorbitant interest rates. The state’s constitution specifies that consumer loans, loans for personal use, cannot exceed 17% per year regardless of the discount rate.
After the state high court ruling on the Check Cashiers Act eight years ago, former Arkansas Attorney General Dustin McDaniel demanded that the payday lenders cease their lending practices immediately, void any and all current and past-due obligations of their borrowers, and refrain from any collection activities related to these type loans.
“These businesses have made a lot of money on the backs of Arkansas consumers, mostly the working poor. Charging consumers interest in the range of 300% to 500% is unlawful and unconscionable, and it is time that it stops,” McDaniel said, adding that he would any violations of the state’s usury limits would likely result in a lawsuit by the state’s AG office.
Since that time, most payday loan operators have moved out of the state, including large national chains and publicly-traded companies like Advance America’s Cash Advance Centers, First America Cash Advance, Rushmore Loan Co. and Ace Cash Express, according to Peggy Matson, executive director of Arkansas State Board of Collection Agencies.
Matson said since the 1999 Check Cashiers Act was declared unconstitutional by the state Supreme Court, the state Board of Collection Agencies no longer regulates the industry except for a few operators that offer check-cashing services.
“If anyone is offering payday loans, they are doing it under the table or out of the trunk of their cars,” Matson said jokingly.
Matson said there has been some speculation that some bank-affiliated operators with products similar to the payday lending industry was planning to locate to central Arkansas this year, a notion that has also been floated by other Arkansas business sources of late.
Separately, Google announced last week that beginning July 13 it longer allow ads for loans where repayment is due within 60 days of the date of issue.
“In the U.S., we are also banning ads for loans with an APR of 36% or higher When reviewing our policies, research has shown that these loans can result in unaffordable payment and high default rates for users so we will be updating our policies globally to reflect that.,” said David Graff, Google’s director of global product policy.
Google said the change is designed to protect online users from deceptive or harmful financial products, but will not affect companies offering loans such as mortgages, car, student and commercial loans, and credit cards and other revolving line of credit. According to Graff, Google disabled more than 780 million ads in 2015 for reasons ranging from counterfeiting to phishing.
“Ads for financial services are a particular area of vigilance given how core they are to people’s livelihood and well-being,” said Graff.