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The Biden Administration Should Bolster Predatory Loan Protections

Restoring “Ability to Repay” Rule Would Help Protect Human Rights in the US

A manager of a financial services counts cash being paid to a client as part of a loan in Ballwin, Missouri on August 9, 2018 © 2018 Sid Hastings/AP Images

Millions of people in the US do not have enough money to cover basic needs and may be forced to turn to so-called payday lenders – short-term, small-dollar lenders who charge interest rates that can exceed 390 percent – to survive. Borrowers often have to take out another loan to cover the first because of the extortionate interest rates and fees.

This is the “debt trap” at the heart of the business model that generates billions of dollars each year for predatory lenders at the expense of some of the country’s most vulnerable people. This ruinous cycle of debt poses grave risks to human rights because it forces people to forgo basic needs such as food or delay rent and utility payments.

The federal government passed relief measures during the pandemic that likely helped keep many people in the US from having to resort to high-cost loans. But as these measures expire, predatory lenders stand to profit from people in precarious economic situations.

In 2017 the Consumer Financial Protection Bureau (CFPB) issued an “ability to repay” rule, which required certain lenders to determine whether a borrower could actually repay a loan before they were allowed to lend. While this rule did not cover all potentially exploitative loans, it would still help protect many consumers from falling into a debt trap.

The administration of former President Donald Trump opposed this protection and the CFPB suspended the rule following fierce pushback from the industry. It eventually revoked the rule in 2020. Under the administration of President Joe Biden, the CFPB has yet to prioritize reinstating this critical protection, though Congress has reversed other harmful Trump-era policies on payday lenders.

The CFPB should immediately restore and strengthen the ability to repay rule, providing safeguards against extortionate lending practices that are critical to protecting human rights, especially those of Black, Latinx, and low-income communities that are disproportionately impacted.

Restoring the CFPB’s ability to repay rule is not sufficient to truly eliminate predatory loans. Additional regulations that cap interest rates; improve financial literacy; and provide people living in poverty with access to fair, non-exploitative credit are also required. However, people will remain susceptible to predatory practices so long as they lack the income to meet their basic needs. Without structural reforms to address persistently high poverty and stagnant wages, predatory lenders may find new ways to exploit the vulnerable.


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