Consumers in need of quick cash to pay for everything from doctor bills to getting the car repaired are just the kind of customers payday loan companies are looking for. Once these companies get a consumer hooked, they are reeled in and stuck in a never-ending cycle of debt.
Last month, the CFPB proposed rules barring mandatory arbitration, making it easier for consumers to file class-action lawsuits against financial institutions. The month before that, the Labor Department announced it was planning to overhaul retirement savings advice. All this is taking place because of actions by President Barack Obama to basically change the balance of power between consumers and financial institutions, according to the Wall Street Journal.
This month, the focus of the CFPB is entirely on the payday loan industry, mostly the store-front lenders in rundown shopping malls and other less desirable areas of our cities. These lenders extend credit to over 12 million lower-income households, from payday to payday.
This part of the financial market, short-term loans, has been abandoned by banks, leaving a whole segment of society for the pickings. Typically, payday loans tie up the borrower’s paycheck from payday to payday with an annual percentage rate in excess of 390 percent.
What may have been a small loan to fix the car turns into a semi-monthly trip to the lender, where eventually the loan is used to pay the rent or buy groceries. According to the Center for Responsible Lending, $3.4 billion is drained annually from consumers, and 75 percent of payday loans were taken out by consumers with over 10 payday loans a year under their belt.
But the CFPB is proposing three simple rules to hopefully remedy this situation, actually something the lenders should have been doing all along.
1. Make sure the borrower can afford to pay off the loan: Called the “full payment test” by CFPB, this means the lender must verify the borrower can afford to make the loan payment and still have enough money left over to meet living expenses and other financial obligations.
“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” said CFPB Director Richard Cordray in a statement, according to CNN Money. “It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”
2. End the “debt trap” cycle: Now this proposal is the clearest and simplest. Basically, it is going to be harder for these payday lenders to refinance or re-issue loans, trapping people in their “debt-traps.” The CFPB says that 80 percent of payday loans are re-borrowed within a month.
Additionally, in this category, the proposal would prevent a lender from issuing a similar loan to someone wanting more money or wanting to roll over a loan within 30 days of paying off a previous payday loan. The new rules will also limit when a loan could be refinanced.
3. Regulating penalty fees: Seeing as many payday lenders have access to a borrower’s checking account if a payment is not forthcoming, they can automatically collect a payment when the borrower gets paid. But if the borrower has insufficient funds in his or her checking account, this will result in huge fees, for the lender and borrower.
These proposed rules have been needed for a long time, particularly to protect lower income families. The lack of any regulations governing these short-term loans is the reason why banks and other financial institutions have steered clear of this type of loan. The CFPB is opening the proposed rules for public comment, which needs to be submitted before September 14.
To read the proposed CFPB rules, go HERE.
For commenting on the proposed rules, you can use one of these methods:
Email: FederalRegisterComments@cfpb.gov. Include Docket No. CFPB-2016-0025 or
RIN 3170–AA40 in the subject line of the email.
Posting on web page: http://www.regulations.gov. Follow the instructions for submitting comments.
