The Consumer Financial Protection Bureau on Thursday is set to unveil proposals targeting payday lenders forcing them to verify if borrowers can afford to repay debts.
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The roughly 1,300 pages of proposed rules would require lenders to do some extra research to make sure consumers can actually pay back these loans without having to take out new ones.
“Too many borrowers seeking a short-term cash fix are saddled with loans they can not afford and sink into long-term debt”, CFPB Director Richard Cordray said in a statement. “And our research has shown that too many of these loans trap borrowers in debt they can not afford, instead of tiding them over in an emergency”. It will also be harder for the lenders to take fees out of a borrower’s bank account.
Advocacy groups here in Alabama are urging consumers to support the proposal to tighten short term lending regulations.
While the financial trade group threatened litigation, proponents were calling on the bureau to make the rules even stricter. The CFPB said it is concerned that these practices lead to “collateral damage in other aspects of consumers’ lives”.
The rule would require lenders to include a “full payment” test to determine the suitability of the loan prior to credit being given to the consumer. And while these loans are advertised as short-term, emergency funds, it generally takes borrowers five months and $520 in fees to pay them off. He says it is like “getting in a taxi just to drive across town and you find yourself in cross-country journey that can be ruinously expensive”. With each new loan, the consumer pays more fees and interest on the same debt.
“There are more payday loan offices in Missouri than there are McDonalds, Starbucks, and Wal-Marts combined”, consumer protection attorney Dale Irwin said. A typical two-week payday loan with a $15 fee per $100 borrowed equates to an annual percentage rate (APR) of nearly 400 percent.
Elliott Clark took out $2,500 in loans when his wife broke her ankle and couldn’t work. The rates on installment loans and auto title loans can be similarly high.
“These strong proposed protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment loans”. In turn, those increases could force some companies to drop payday lending, and send borrowers to loan sharks or other unregulated lending sources, they warned. Payday loans are illegal in the other 14 states.
The public comment period on the new rules will begin shortly and continue until September 14.
The agency is seeking comments from interested parties and the general public on the proposals before final regulations are issued.
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While the CFPB rule does create such an affordability standard, the rule also allows for too many exemptions and leaves open too many loopholes for that standard to meaningfully reduce the harm of predatory lending.
