New Regulations Limit Predatory Payday Loan Lenders
The Consumer Financial Protection Bureau (CFPB) proposed new rules June 2, marking the federal government’s first attempt to regulate the predatory practices of payday loan lenders. The regulations will curb certain high interest payday, auto-title, and other small loans that feature outrageous fees and interest rates and leave borrowers in long term debt.
With approximately one in 20 Americans taking out payday loans each year, the multi-billion dollar industry has faced heavy criticism for creating a profit-oriented system where borrowers cannot pay off loans and are forced to re-borrow.
According the CFPB data, 80 percent of payday loan borrowers take out more than one loan, 45 percent take out four or more, and about 15 percent take out 10 or more. So, more than one out of 10 “short-term” loan borrowers are in debt for over four months.
Under the new rules, payday loan officials and other lenders will have to incorporate a full-payment test to ensure borrowers will be able to repay the loan or installment payments on time, while also fulfilling other financial responsibilities and basic needs.
Further, the rules limit payday lenders’ ability to debit borrowers’ accounts without giving them written notice–an imperative move when 50 percent of online borrowers had a failed debit attempt or overdrafted their account in the past 18 months. These failed debit attempts lead to overdraft fees, and more than one third of borrowers with a failed payment are in jeopardy of losing their account.
The last major limit imposed on payday lenders requires a cool-off period after borrowers take out three consecutive payday loans. This is a devastating blow to payday lenders who collect 75 percent of their loan fees from borrowers who take out more than 10 loans in a year.
The CFPB rules are intended to reduce the circumstances in which payday loans can lead to exhaustive debt. However, the rules face criticism from payday loan lenders, because they limit a necessary business for many people who cannot access traditional lines of credit due to bad credit history, lack of a dependable checking account, and other reasons. While this criticism is to be expected, the regulations have also received skepticism from consumer advocates claiming that the rules are not expansive enough.
The Center for Responsible Lending points out that numerous loopholes will allow payday lenders to still trap borrowers in debt. Primarily, the full-payment test is only required for individuals taking out more than $500. However, as demonstrated in a former Law Street piece, a loan with the average principal of $325, if renewed eight times (or over the course of four months) would cost the borrower $798–1.5 times the initial loan.
While the new CFPB rules mark an important step in limiting the predatory nature of payday loans, which rely primarily on poor and vulnerable people who lack the bargaining power to reject 400+ percent interest rates on loans, the rules are not without flaw. By setting too high of a threshold for certain rules, the CFPB allows a large portion of the payday loan business to continue unfazed.
Regulations need to provide protection for all borrowers who enter a loan agreement where the lender has coercive power. As it currently stands, the CFPB’s rules are not expansive enough to make a real dent, and they fail to propose an alternative to payday loans, which are the only option for many customers.