New Payday Loan Rules Could Leave Millions “At Risk” in Debt Traps
The Consumer Financial Protection Bureau released a final payday loan rule on Tuesday, repealing Obama-era provisions that would have required lenders to ensure borrowers could repay their loans before issuing cash advances.
To make sure borrowers don’t get caught up in so-called debt traps, the CFPB in 2017 issued new multi-part payday loan regulations that, among other things, required payday lenders to they verify that borrowers could afford to repay their loan on time by verifying information such as income, rent, and even student loan payments.
But the Trump administration blocked the entry into force of those rules and called for a review. On Tuesday, the CFPB – under new leadership – issued a finalized rule that does not require lenders to verify that borrowers can afford to pay.
This “ensures that consumers have access to credit and competition in states that have decided to allow their residents to use such products, subject to the limitations of state law,” the agency said in a statement. In addition, CFPB staff found that there was “insufficient legal and evidentiary basis” to require lenders to verify consumers’ ability to repay loans.
The CFPB has maintained restrictions in place that prohibit payday lenders from repeatedly attempting to withdraw payments directly from a person’s bank account. Some payday lenders attempt to get their money back by taking what is owed to them directly from borrowers’ checking accounts, which borrowers grant access to as a condition of the loan. But unexpected lender withdrawals can lead to costly overdraft fees and damage credit scores.
Consumer advocates say the CFPB’s case to overturn the 2017 rule does not stand up to scrutiny and have condemned the agency’s decision to remove underwriting mandates. “By eliminating repayment capacity protections, CFPB is making a serious mistake that exposes the 12 million Americans who use payday loans each year to unaffordable payments at annual interest rates of almost 400% on average Says Alex Horowitz, senior researcher with the Pew Charitable Trusts Consumer Credit Project.
âLast October, we learned that in return for contributions to the Trump campaign, payday lenders were boasting that they could ‘pick up the phone and … get the president’s attention’ to push back the regulations, ‘ Sen. Sherrod Brown (D-Ohio) said in a statement Tuesday. “Today, the CFPB gave payday lenders exactly what they paid for by removing a rule that would have protected American families from predatory loans that trap them in cycles of debt.”
Why payday loans can be problematic
Tuesday’s CFPB final rule comes at a time when Americans are increasingly seeking credit. One in three Americans has lost income due to the coronavirus pandemic, according to the Financial Health Network 2020 US Financial Health Pulse, a survey of more than 2,000 American adults between April 20 and May 7, 2020.
Among Americans who report losing income, 3% of those surveyed said they had to borrow money using a payday loan, deposit advance, or pawnshop.
Payday loans can be easy to get, but difficult to repay. In the 32 states that allow payday loans, borrowers can usually take out one of these loans by going to a lender and simply providing valid ID, proof of income, and a bank account. Unlike a mortgage or car loan, no physical collateral is usually required.
Most lenders who offer payday loans require borrowers to pay a “finance charge” (service charge and interest) to secure the loan, with the balance due two weeks later, usually on your next payday. Nationally, the average APR on a payday loan is around 400%. This is compared to personal loan rates which vary from 10% to 28% on average, depending on your credit. Or credit cards, which charged an average interest rate of around 15% in February, according to the Federal Reserve in St. Louis.
Lenders say the high rates are necessary because payday loans are risky to finance. And opponents of the Obama-era payday loan rule argue that the ability to pay provisions were too onerous and onerous. “The repayment capacity provisions were simply unenforceable and imposed burdens on consumers and lenders in the form of unreasonable levels of documentation not even required of mortgage lenders,” D. Lynn DeVault, president of Community Financial said Tuesday. Services Association of America. . The complex and costly regulation “would have effectively bankrupted lenders rather than protecting consumers,” she added.
However, borrowers often cannot repay these high cost loans right away, so they are dragged into a cycle of borrowing and accumulating finance charges. Research conducted by the Consumer Financial Protection Bureau under the Obama administration found that nearly one in four payday loans are re-borrowed nine or more times. Plus, borrowers take about five months to repay loans and cost them an average of $ 520 in finance charges, Pew reports. This is in addition to the original loan amount.
The Payday Loan Landscape
The rules of the Obama era were already starting to work, says Horowitz: âLenders were starting to make changes even before [the 2017 rules] officially took effect, more secure credit was already starting to flow, and harmful practices were starting to fade away. Today’s action puts all of that at risk. “
Currently, 12 states – Arizona, Arkansas, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, New Mexico, Pennsylvania, Vermont, and West Virginia – ban these types of loans entirely. Of those that allow payday loans, 16 states and the District of Columbia have provisions capping interest rates at 36%, while other states have placed other restrictions on payday loans. Currently, 32 states allow small dollar loans without major restrictions, according to the CFPB.
More and more states are trying to add restrictions. Last month, the Nebraskans for Responsible Lending coalition said it had collected enough signed petitions to push for an initiative that would cap the annual interest rate on payday loans at 36% in the state’s November ballot.
In November, federal lawmakers introduced legislation through the Fair Credit for Veterans and Consumers Act that would cap interest rates at 36% for all consumers nationwide. The bipartisan legislation – which is the latest attempt to cut payday loans at the federal level – was built as part of the 2006 Military Loans Act, which capped loans at 36% for active duty members. But despite Democratic and Republican co-sponsors, the bill remains at a standstill.
“With the CFPB abandoning its role in protecting families, Congress must act now to extend a 36% national tariff cap to all families – which is widely supported by Americans across the ideological spectrum,” said Lauren Saunders , associate director of the National Consumer Center for Law.
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