Several members of the CFPB’s Consumer Advisory Board urged the watchdog on Wednesday to consider drafting rules aimed at enhancing consumer protections for payday loans.
The board members, who were convening their second meeting, asked the CFPB to consider mandating longer repayment periods to reduce loan renewals, requiring lenders to verify borrowers’ ability to repay on the loan and limiting the number of times a borrower is allowed to roll over small-dollar payday loans.
CFPB Director Richard Cordray said during the meeting that debt traps, products that “trigger a cycle of debt,” are identifiable in that their success relies on a certain percentage of consumers rolling over debts on a recurring basis in order to generate high fee income.
“For consumers in a financial jam with nowhere to turn, they may think their only option is to use such a product,” Cordray saids. “At first glance, the fees may seem small compared to the need for quick cash. But when the payment comes due, or when repayment is automatically taken from their next deposit into their accounts, consumers may not have enough money to repay the shortfall and still meet their living expenses. So they need to borrow again to avoid defaulting and to keep making ends meet. For a considerable number of consumers, the fees will pile up and leave them worse off.”
Cordray said, however, that there is a demand for short-term credit products that are designed to simplify repayment and can help consumers who use the products responsibly.
“We want to make sure that consumers can get the credit they need without jeopardizing or undermining their finances,” Cordray said. “Debt traps should not be part of their financial futures.”