Pew also noted that payday firms have already shifted much of their business to offering high-cost installment loans, which are repayable over a longer period of time but which also commonly charge triple-digit interest.
Advertisement
The CFPB says that because of the way the loans work now, borrowers who use them can often be overwhelmed by fees and trapped into a cycle of debt that forces them to skip important bills or make other hard financial choices.
Another part of the proposal would require lenders to use a “full-payment” test to determine whether borrowers can afford each loan payment and still meet basic living expenses. But as unscrupulous lenders leave the business, that will create an opportunity for other lenders to devise fair short-term loans. One-in-five payday loan sequences end up in default and one-in-five single-payment auto title loan borrowers end up having their vehicle or truck seized by the lender for failure to repay.
Sweeping new rules proposed Thursday by the Consumer Financial Protection Bureau could upend the payday loan industry, which consumer advocates say often traps cash-strapped workers into a vicious cycle of borrowing.
The head of the payday-lending industry trade group called the proposed rules “a staggering blow to consumers that will cut off access to credit for low-income Americans”. The clampdown seeks to address two of the most common complaints surrounding the payday loan industry. “Restricting credit options will ultimately drive up costs for consumers, cause the loss of thousands of jobs in the state, and force borrowers underground to unlicensed lenders”, Advance Financial chief executive officer Tina Hodges said in a statement released by the Tennessee Flexible Finance Association. “I strongly support the adoption of these proposed regulations and will continue to fight for greater consumer protections in my role as a member of the House Committee on Financial Services”.
“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, calling the proposal “mainstream” and “common-sense”.
The Consumer Financial Protection Bureau organized the hearing to help people struggling to pay back these loans and put food on the table.
“It also sets a risky precedent for federal agencies crafting regulations impacting consumers”, Shaul says in a news release. “In doing so, the CFPB can stop the debt trap once and for all”.
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 CFPB rules would do nothing to protect borrowers from these loans, Bourke said. “And our research has shown that too many of these loans trap borrowers in debt they can not afford”. At the same time, it would limit the number of times a lender could try to debit a borrower’s bank account for an outstanding payment, with the CFPB saying failed withdrawal attempts rack up bank fees for borrowers.
The CFPB plans to roll out in the coming months new rules governing prepaid cards, bank overdraft fees and debt collection. The new rules require lenders to notify the borrower before the withdrawal.
Rosa Evans, 57, of Birmingham, Alabama said she took out an auto title loan for about $1,000 five years ago and was working toward repaying it when she lost her job.
Advertisement
Comments on the proposal are due by September 14, 2016 before final regulations are issued.
