The CFPB is proposing that lenders must conduct what’s known as a “full-payment test”.
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A federal agency has proposed new regulations for short-term, high-interest lenders in an effort to end borrowers’ “payday debt traps”.
The Community Financial Services Association (CFSA) will be releasing a response for broadcast outlets on Thursday, June 2, 2016, after the Consumer Financial Protection Bureau (CFPB) field hearing at the Kansas City Convention Center. “Too many borrowers seeking a short-term cash fix are saddled with loans they can not afford and sink into long-term debt”.
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.
The agency says it has “serious concerns” that “risky” lending practices are “pushing borrowers into debt traps” – chief among them, that borrowers “are being set up to fail with loan payments that they are unable to repay”. “The return on a $500 loan is certainly not the return you’re going to get on a $500,000 mortgage”. Then it’s repaid with the person’s next paycheck. Borrowers typically seek these loans to cover rent or other costs ahead of their next paycheque. Loan volume could fall at least 55 percent, according to the consumer agency’s estimates, and the $7 billion a year that lenders collect in fees would drop significantly.
The industry association notes that traditional banks don’t adequately serve 24 million US households that don’t fit into the mainstream, regulated banking system. A 2013 report by the CFPB found that the median borrower took out 10 loans over the course of a year and spent $458 on fees.
“The Federal Reserve reported last week that forty-six percent of Americans can not pay for an unexpected $400 expense”.
“Regulators need to stop harmful loan practices but they also need to set standards that encourage lower-cost alternatives”, Bourke said. Instead, the bureau has prescribed a rule that fits its pre-determined conclusions and will actually harm consumers’ financial well-being.
The CFPB’s proposal offers lenders a few ways around the ability-to-repay rules.
Federal payday loan restrictions have been more than four years in the making.
It has been a tough month for Payday loan providers.
The ability-to-repay provision would require that lenders verify a borrower’s after-tax income, government benefits or other sources of income, and make sure that borrower can make timely loan payments /a while still being able to afford basics, like food and shelter. But the Center for Responsible Lending’s data also speak loud and clear – about subversion of the statewide consensus that Ohioans reached in 2008, subversion unchecked by the legislature. As such, we are committed to working with policymakers, consumer advocates, and CFSA member companies to ensure that the payday loan is a safe and viable credit option for consumers.
U.S. Sen. Sherrod Brown, D-Ohio, said in an interview he’s “confident” this reform will work where the last one failed.
Pommerehn said that from the industry’s perspective, safeguards are needed to help consumers who get caught in cycles of debt.
Three major title lenders, their owners or key executives, pumped just over $9 million into state political campaigns over the past decade as they lobbied to kill bills that hindered their operations. “My goal is that they follow the rules”.
Coun. Evan Woolley, vice-chair of the standing policy committee on community and protective services, said it’s “hugely important” for financial institutions to offer short-term loans as an alternative to payday lenders.
Payday Loans: A Helping Hand Or Predatory Quicksand?
Comments are due by September 14. One condition would be that the sum the consumer is required to pay each month is no more than 5 percent of gross monthly income. It would also cap the number of short-term loans made in quick succession.
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Secondly, the CFPB would require that lenders give additional warnings before they attempt to debit a borrower’s bank account, and also restrict the number of times they can attempt to debit the account.
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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.
