The Consumer Financial Protection Bureau proposed new rules on Thursday created to end what it calls “payday debt traps” by requiring lenders to make sure a borrower can repay that loan before approving it.
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The relatively new Consumer Financial Protection Bureau, however, Thursday announced a new set of rules aimed at reining in the loan predators and encouraging more responsible lending practices. The rule would take the revolutionary action of “requiring lenders to take steps to make sure consumers have the ability to repay their loans”. “Too many borrowers seeking a short-term cash fix are saddled with loans they can not afford and sink into long-term debt”, said CFPB Director Richard Cordray in a statement. The bureau would also provide safe harbors for longer-term loans, one modeled on the credit union industry’s “payday alternative loan” model and another for longer-term loans with a maximum 36 percent April, single origination fee of $50 or less or that is reasonably proportionate to the lender’s underwriting costs, and projected annual default rate of 5 percent or less for all loans made under the safe harbor.
The proposals follow a 2014 study by the agency that found 62 percent of all payday loans go to consumers who extend repayments and ultimately owe more in fees than what they initially borrowed.
In addition, the Proposed Rules would require covered lenders to give notice of upcoming due dates, and lenders would not be permitted to make more than two automated debt/collection attempts should a payment channel such as ACH fail due to insufficient funds.
About 12 million USA residents take out payday loans and other similar, short-term, high-interest loans each year, frequently to cover daily living expenses. “Borrowers should not have to bear the unexpected burdens of being hit repeatedly with steep, hidden penalty fees that are tacked on to the costs of their existing loans”. The agency will evaluate comments on the proposal, due September 14, before issuing final regulations.
“The people borrowing the money are having to renew loans on average of eight to ten times”, said Garrett. “In Kansas City alone we lose more than $27 million every year to the payday loan industry”.
The new regulations come after many complaints related to quick-fix loans, together with the fact that there is little consumer protection governing the interest rates that lenders can charge. This common practice can rack up overdraft fees for borrowers and make it even harder to pay back the balance of the loan. The federal government’s Consumer Financial Protection Bureau is working to end payday debt traps. Roughly 45 percent of payday customers take out at least four loans in a row.
Interest on payday loans is capped at $21 per $100 dollars in Ontario for a two week period. Bill Osborne says years ago he took out a title loan and lost his vehicle because he couldn’t pay the $1,000 in interest on a $200 loan.
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People in Dallas and some other areas have an alternative, community loan centers, with lower interest and fees.
