Ability-to-Repay vs. Ability-to-Collect

Earlier this month Opportunity Fund submitted comments to the Consumer Financial Protection Bureau regarding their proposed rule on payday, vehicle title, and certain high cost installment loans. The proposed rule is a critical step in stopping the harms of unaffordable loans and we are glad to see the CFPB taking action on these issues that particularly affect disadvantaged communities lacking access to responsible capital and credit.
Opportunity Fund has helped finance nearly 15,000 low and moderate income entrepreneurs, students and families since our founding over 22 years ago. In that time we have seen how responsible financing empowers our customers to pursue pathways to prosperity. During the same period we have also seen many prospective customers struggle under significant amounts of high cost debt that jeopardizes their ability to pursue opportunities for a better life.
In California alone, payday and car title loans drain nearly $750 million in fees from consumers each year, a significant loss both to borrowers and to the overall state economy.  Larger installment loans (greater than $2,500) are often priced at APRs well above 100% and represent the fastest growing segment of the small dollar loan market in our state. These loans are offered based on the lender’s ability- to-collect, rather than the borrower’s ability-to-repay. This means that these loans are profitable because lenders get first access to a borrower’s checking account, regardless of the negative consequences of cascading overdraft fees, closed bank accounts and damaged credit.
The core principle of the CFPB’s proposal is the right approach – it requires lenders to ensure that a loan is affordable to a consumer without having to re-borrow or default on other expenses. This is critically important to stopping the harms of this predatory business model, and we strongly support it. This basic principle should be applied in some way to every loan – primarily through a direct ability to repay calculation with a minimum of exemptions. We look forward to seeing the CFPB’s final ruling which we hope contains the strong protections consumers need, both here in California, and elsewhere around the country.