CFPB research has shown that while payday loans are designed for the short term, many borrowers simply renew their loans when payment is due.
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“It also sets a risky precedent for federal agencies crafting regulations impacting consumers”, Shaul says in a news release.
The Consumer Financial Protection Bureau reports that the median fee on a storefront payday loan was $15 for every $100 borrowed.
“The very economics of the payday lending business model depend on a substantial percentage of borrowers being unable to repay the loan and borrowing again and again at high interest rates”, Cordray explained. The advocacy group also praised the effort to deter payday firms from repeatedly trying to collect loan payments directly from a customer’s bank account, noting that millions of borrowers get hit with overdraft and other fees.
The long-awaited rule was met with criticism from the payday loan industry.
Lenders would still have the option to loan up to $500 to consumers without a full-payment test but only to consumers without any outstanding short-term loans.
“Most of the payday stores are found in parts of town where you have working individuals who are not making an exorbitant amount of money”, said Rev. Alec Miller of Cooperative Baptist Fellowship. The bureau has proposed new rules that would require payday lenders verify a borrower’s ability to afford a loan and restrict some lending and fee practices.
However, the $38 billion industry is costing too many Americans far more than they can afford, with interest rates that can reach 300 percent annually, or even more, a federal watchdog says. The new rules require lenders to notify the borrower before the withdrawal.
The payday lenders’ association says the rule will eliminate 84% of loan volume, and quoted a figure reported last week by the Federal Reserve that 46% of Americans can’t pay for an unexpected $400 expense, or would sell something to cover it or borrow money. Some of the installment loans covered by the proposal have balloon, or lump-sum, payments required after a number of interest-only payments.
Another crackdown is coming on the payday loan industry. The CFPB noted general auto loans, home mortgages, student loans, credit cards, and pawnshop agreements are not covered under the proposal.
After Google chose to ban online ads for Payday lenders, comes news that today the USA government is looking to unveil new rules to regulate the industry. They use small loans to buy small appliances, pay rent or fund emergency repairs on the family vehicle – loans that aren’t accessible through many banks. The agency will evaluate comments on the proposal, due September 14, before issuing final regulations.
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The changes have the potential to save Florida residents millions of dollars if changes are made before the rule is finalized, said Alice Vickers, director of the Florida Alliance for Consumer Protection.
