CEI submitted comments on the Consumer Financial Protection Bureau’s (CFPB) proposed rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans. Though billed as cracking down on payday lenders, CEI warns that the rule change will do more harm than good to borrowers. CEI lays out three overarching criticisms of the proposed rule:
The rule will have a much broader effect in discouraging other financial service providers – including credit unions, community banks, and non-profit lenders – from providing short-term credit to lower-income consumers;
The new “ability-to-repay” standard is a bad one for evaluating short-term unsecured loans. Barring poor people from getting loans for which they may not have the “ability to repay” means that those denied credit will then lack the ability to pay for basic goods and services. Thus, the rules reinforce an existing cycle of poverty;
The proposed rule will adversely affect the market for voluntary protection products (VPPs). VPPs form an important and valuable part of the auto loan market, providing peace of mind to car buyers. VPPs include products like credit insurance as a form of debt protection against unforeseen events, such as unemployment or illness, in order to keep vehicle payments and other such contracts up to date. They are generally sold alongside and bundled with vehicle financing. The prime purpose is that of insurance. Because they are bundled in with vehicle financing, their fees and monthly costs can easily drive a loan’s effective APR above the 36 percent “all-in APR” floor for regulation under the proposed rule. Because the regulation of loans above 36 percent all-in APR is onerous, we can expect auto dealers to stop offering these products to their customers.