The Consumer Financial Protection Bureau on Thursday is proposing new regulations to protect consumers from predatory lending practices that the CFPB’s top regulator calls “debt traps”.
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If enacted, the rules generally will require lenders to verify that borrowers can afford the loans and cap the number of times people can take out successive loans. “Too many borrowers seeking a short-term cash fix are saddled with loans they can not afford and sink into long-term debt”.
The CFPB research showed that median fee on a payday loan is $15 per $100 borrowed with a median loan term of 14 days, resulting in an annual percentage rate of 391 percent on a loan with a median amount of $350.
More than 80% of auto title loans, transactions in which consumers pledge their vehicles as collateral, are rolled over or extended on the day they’re due because borrowers can’t afford to pay them in full, the CFPB also found.
Many payday lenders believe that consumers, especially millennials, need the alternative financial options that they provide and that the new regulations will damage not only their business, but also the market that makes use of their services. The rule would define certain small-dollar loans as “abusive and unfair” if lenders fail to reasonably determine borrowers’ ability to repay the loan or satisfy an exception.
“The people borrowing the money are having to renew loans on average of eight to ten times”, said Garrett.
The proposed rules will face many months of view and possible court challenges as well. “The CFPB proposal goes 0 for 3″, Nick Bourke, director of Pew’s small-dollar loans project, said in the statement.
Payday loans are short-term loans due on the borrower’s next payday.
Protesters, who gathered in Eau Claire Thursday, say people who borrow money from payday loan sources often get buried in debt.
“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”, said Mike Litt, U.S. Public Interest Research Group’s national consumer program advocate.
“We don’t have a usury law here in Nevada”, she said, “and so, the interest rates on the payday or title loans can be anywhere from 30 percent to 1,000 percent”.
Payday lender ACE Cash Express is seen on San Mateo Blvd.in Albuquerque, N.M. High-interest lending practices are being targeted by new federal regulations. The average payday loan borrower spends almost half the year in debt, and spends an average of $520 in fees to repeatedly borrow $375, according to Pew.
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Cordray compared the situation to getting into a taxi for a crosstown ride and finding oneself stuck on a “ruinously expensive” trip across the country. Bill Osborne says years ago he took out a title loan and lost his auto because he couldn’t pay the $1,000 in interest on a $200 loan. “The proposal from the Consumer Financial Protection Bureau marks the first attempt by the federal government to regulate shorter-term loans, which also include auto title and installment lending”.
