Consumer advocates fear that a proposed federal rule aimed at curbing costly payday and car title loans might undermine a Georgia law that makes many such loans illegal.
The controversial loans have drawn a lot of scrutiny — and outright bans by Georgia and a few other states — because they often come with high fees and interest rates that can add up to more than 300 percent a year, making it hard for borrowers to pay them off.
In July, the federal Consumer Financial Protection Bureau proposed rules that would generally require payday lenders to determine whether a borrower can afford the loan he or she is taking out.
It could be more than a year before any final rules issued by the CFPB take effect, even as the agency faces an uncertain future. President-elect Donald Trump and the Republican-dominated Congress are expected to try to restrain the agency, and to repeal or re-write the Dodd-Frank law that created it.
Meanwhile, consumer groups in Georgia fear the CFPB’s proposed rule could weaken the state’s much tougher law, which bans such loans outright and threatens violators with up to 20 years in prison if convicted of violating the ban.
“Dangerous loopholes in the proposed rule could provide payday lenders a license to creep back into our state, eroding protections developed through decades of work that save Georgia consumers millions of dollars each year,” Liz Coyle, executive director of Georgia Watch, said last month in a letter to the agency.
Payday loans have been illegal in Georgia for decades. Typically, the loans are for about $500 for a week or two, and lenders often tap directly into customers’ bank accounts to collect their payments.
Despite the ban, such loans once proliferated in Georgia as lenders found ways around the ban. But in 2004 Georgia put teeth in the ban with a law that slapped lenders with prison sentences of up to 20 years if they were caught and convicted.
Critics say the proposed federal regulation comes with a big loophole that allows lenders to charge sky-high interest rates on up to six loans in a year before the ability-to-pay rule kicks in.
In the letter, Georgia Watch and other consumer groups said the proposed federal rule “exempts six 400 percent payday loans from the ability -to-repay requirement altogether.”
It also falls short, the critics said, because it doesn’t recognize states’ caps on interest rates.
In its proposed rule, the CFPB said it based the six-loan limit on similar rules by Washington and Delaware. Those states’ approach was to cut off loans if the customer had rolled over loans several times and seemed unable to get out of a debt trap.
The CFPB’s rule, it appears, might also strengthen one gap in Georgia’s restrictions on high-cost loans.
Georgia’s felony loan law applies only to small, short-term payday loans exceeding the state’s 60 percent interest rate cap, but not to car title loans, which fall under a separate state pawn loan law.
The CFPB’s proposed rule also applies to title pawn loans.
Earlier this year, the agency cracked down on Savannah-based TitleMax, one of the nation’s largest car title lenders.
TitleMax was hit with a $9 million fine in September after the CFPB accused the company of misleading customers on the cost of its loans. The federal agency said the company didn’t disclose that some loans carried annual interest rates topping 300 percent.
TitleMax's parent company, TMX Finance, which didn't admit or deny guilt, said it had been "transparent and cooperative" with the CFPB, and changed its loan practices to address the agency's concerns.
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