The release last week (July 7, 2020) of the Consumer Financial Protection Bureau’s final “Payday, Vehicle Title, and Certain High-Cost Installment Loans” rule is significant in that it removes the “ability to repay” provisions that were targeted at payday lenders.
Neither the original rule or its updated version apply to the installment lending industry, and NILA welcomes the modification as an indication that past over-reach by the agency is being addressed. Nevertheless, we also have concerns that the adjustment to underwriting requirements will leave consumers more vulnerable to the cycle-of-debt that has been the impetus for so much payday and title loan regulation in the past.
Unlike Payday and Title Lenders, the Traditional Installment Lenders represented by NILA, offer loans repaid in regularly scheduled payments of principal and interest, rather than all at once. It is the single “balloon payment” which many consider responsible for a cycle-of-debt, where borrowers who cannot meet their payment must refinance the loan, incurring additional costs as they do so.
This is one of a number of ways in which installment loans differ from payday and title loans. An important additional difference is that installment lenders report loan performance to credit bureaus, allowing borrowers to build their credit and become financially mobile. This is not a feature of payday or title loans.