Consumer Financial Protection Bureau is Set to Take on “Debt Traps”

As the intelligent and well-informed readers of Washington Monthly know, the Consumer Financial Protection Bureau is the brainchild of Elizabeth Warren and was created as part of the Dodd-Frank Wall Street reform bill. The Bureau doesn’t get a lot of attention these days, perhaps because what they do doesn’t involve marching bankers off in handcuffs. But they are at work every day acting on consumer complaints, developing policy and fighting on behalf of consumers. Here’s just one example:

The Consumer Financial Protection Bureau charged that Encore Capital Group and Portfolio Recovery Associates bought potentially inaccurate debt, attempted to collect unverified debts and used illegal litigation practices to collect debts…

The companies buy outstanding debts from creditors at highly-reduced rates and then attempt to collect on them. According to the CFPB, the companies have purchased the rights to collect more than $200 billion in various defaulted consumer debts.

Encore Capital Group will pay up to $42 million in refunds and stop collection on $125 million in debt, as part of the settlement. It will also pay a $10 million penalty to the bureau’s Civil Penalty Fund.

Portfolio Recovery Associates, which is a subsidiary of PRA Group, has to pay $19 million in refunds, stop collecting on $3 million in debt and pay $8 million to the fund.

The latest CFPB target is auto-title loans.

Compared with payday loans, auto-title loans tend to be larger and have slightly lower interest rates, though they come with a big catch: Borrowers have to put up collateral for these loans, giving the lender the right to take their car if they can’t pay…

The bureau examined about 3.5 million single-payment auto-title loans issued between 2010 and 2013. Those loans, on average, were for just under $1,000 and had annual interest rates of just under 300%…

The report found that when auto-title loans come due, borrowers had to take out new loans, often from the same lender, to pay off the old ones. Most took out at least three consecutive loans, and some took out 10 or more in a row, leaving them indebted for months instead of weeks.

The CFPB calls these loans “debt traps” and notes that 1 in 5 borrowers lose their cars in the process. In the coming weeks, the Bureau plans to release proposed rules to reign in the abuses with these loans – like requiring lenders to assess whether the borrower has enough income to afford the loan, limit the number of times a loan can be refinanced and require lenders to notify the borrower before trying to collect a payment from their bank account.

Professional associations that lobby on behalf of these lenders have responded by pretending that they actually care about borrowers – who won’t have access to their “products” if these rules are enacted. Sorry…if you actually gave a damn you wouldn’t be offering debt traps in the first place.

Nancy LeTourneau

Nancy LeTourneau is a contributing writer for the Washington Monthly.