“And our research has shown that too many of these loans trap borrowers in debt they can not afford”.
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CFPB Board Director Richard Cordray said, “Too many borrowers seeking a short-term cash fix are saddled with loans they can not afford and sink into long-term debt”. He says it is like “getting in a taxi just to drive across town and you find yourself in cross-country journey that can be ruinously expensive”.
The CFPB would address some of those problems by requiring lenders to determine upfront that consumers can repay a loan when it’s due without having to borrow more money and that they can still meet their basic living expenses. CFPB research has shown that while payday loans are designed for the short term, many borrowers simply renew their loans when payment is due. The CFPB found that payday borrowers pay a median $15 in fees for every $100 they borrow, amounting to an annual percentage rate of 391 percent on a median loan of $350.
Less risky longer-term lending options: Lenders would be allowed to offer 2 longer-term loan options with more flexible underwriting, but only if they pose less risk by adhering to certain restrictions.
“The way these products are structured, it’s very hard to repay the loan and therefore people end up borrowing again and again and paying far more in fees and interest than they borrowed in the first place”, Cordray says.
Tennessee Citizen Action, a public-interest group affiliated with U.S. Action, applauded the Consumer Finance Protection Bureau for its proposal released earlier Thursday to regulate the payday and auto-title loan industry and other high-cost loan companies.
The agency will accept comments on the proposed rule until September 14, 2016.
Lenders would have to get written permission from customers to debit an account and gain a “new and specific authorization” to try after two consecutive unsuccessful tries under the proposed rules. It is a good beginning, but there is still much work to be done to ensure this rule truly protects consumers from the legalized loan sharks who prey on our communities in many states. There are now about 16,000 payday loan lenders running online and storefront operations. Even Google last month announce it would ban advertisements for payday loans, saying the industry creates “misleading or harmful products”. After the third loan, borrowers would need to enter a mandatory cooling-off period where they would not be able to take out another loan for at least 30 days. The rule will be most effective only if changes are made before it is finalized.
Claiming Americans consumers have been “set up to fail” by the short-term lending industry, federal regulators on Thursday issued sweeping new rules that would drastically alter the payday and title lending industries. The loans’ nickname refers to the assumption that borrowers will use their next paycheck to pay the money back.
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One proposal is to limit the number of loans a borrower can take out. And so they end up taking out another loan, and then another loan after that, again and again for months or sometimes years, sinking deeper into a quagmire.
