For installment loans with higher interest rates and fees, lenders, under the new rules, would also be required to determine whether borrowers can make the repayments. The agency indicated in this week’s payday announcement that still more rules are coming for that sector, saying it was “launching an inquiry into other potentially high-risk loan products and practices that are not specifically covered by the proposed rule”. One CFPB study found that 80% of payday borrowers took another loan out within 30 days.
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“The CFPB’s proposed rule presents a staggering blow to consumers as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense”, says Dennis Shaul, CEO of the payday lending industry group, the Community Financial Services Association. Further, lenders’ debit attempts would be limited under the rule to restrict certain debt collection fees.
“Since the CFPB was created, the Bureau has worked diligently to understand the payday and auto title market, examine the consumer experience and develop focused and data-driven interventions to prevent harmful practices”, said Tom Feltner, Director of Financial Services at Consumer Federation of America. This includes requiring that lenders take into account the borrower’s ability to repay the loan-the hallmark of responsible lending. 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”. So it seems like forever that this bottom-feeding industry has gotten away with saddling working poor people with loans they can’t afford and then charging them interest rates that can reach 400 percent annually. The CFPB noted general auto loans, home mortgages, student loans, credit cards, and pawnshop agreements are not covered under the proposal. “But while payday loans might seem like easy money, folks often end up trapped in a cycle of debt”.
The rules still face months of review – and potential court challenges – but if they take hold they could dramatically transform, and shrink an industry that provides cash to borrowers in a pinch.
But the economic model for the “payday loan” industry is rigged against them, depending on their inability to pay the loan on time and repeatedly borrow. That is especially true as loans are rolled over into new debt if they can’t be repaid by the original due date, which, often, is when the debtor gets his or her next paycheck. Evans was glad to hear about the proposed regulations and said they would be a huge help to consumers during financial emergencies.
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The public comment period on the new rules will begin shortly and continue until September 14. In the meantime, consumers are encouraged to comment and suggest changes to the final rule that will close loopholes and remove exemptions.
