The federal Consumer Financial Protection Bureau announced new proposed rules on Thursday meant to curb fees on high-interest payday and auto title loans, and Tennessee advocates hailed the move.
Advertisement
As for debt collection, lenders would have to give consumers written notice before attempting to debit the borrower’s bank account. The new regs cover car-title loans, advance deposit products and certain high-cost installment and open-ended loans as well.
Richard Cordray, CFPB Director, said too many borrowers seeking short-term loans are unable to pay off the loans thus sinking into long-term debt. The lenders make the loans by depositing short-term borrowed money directly into the customer’s checking account.
The main criticism of payday lenders is that they issue loans without first verifying that borrowers can afford to repay them, they trap people in an extended cycle of debt and they pile on fees and other charges. During the rulemaking process, the CFPB should ensure that small-dollar loans help borrowers succeed, rather than profiting off of borrowers’ inability to pay back loans that often carry triple-digit annual interest rates.
“The CFPB’s proposed rule presents a staggering blow to consumers as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense”. They worry that lenders will be able to make up to three consecutive payday loans and can offer the loans again after just 31 days.
Payday Loans are an undeniable debt trap: they’re created to send borrowers into a downward spiral of debt, and that debt can keep you living paycheck-to-paycheck.
“There are five groups that have higher odds of having used a payday loan: Those without a four-year college degree; home renters; African Americans; those earning below $40,000 annually; and those who are separated or divorced”, according to a recent report conducted by Pew Charitable trusts. But unsuccessful withdrawals on an account can trigger massive fees from both the debtor’s bank and lender.
The bureau is accepting comments on the proposed rule until September 14.
“There are more payday loan offices in Missouri than there are McDonalds, Starbucks, and Wal-Marts combined”, consumer protection attorney Dale Irwin said.
More information about the proposed CFPB rules is online here and here.
The proposed regulations are likely to face stiff opposition from lobbyists from the payday lending industry and auto-title lending industry, as well as opposition from members of Congress.
Advertisement
He said the effect of these new federal rules is it’s going to “dry up that form of credit for people who need that type of credit”. Those comments will be reviewed before final regulations are issued. Despite complaints about predatory lending, other business officials said payday and other short-term loans remain popular with consumers and have a relatively low percentages of borrower complaints.
