Payday loans will be severely restricted under new rules proposed today by federal regulators.
Primarily, the rules will require lenders to ensure consumers can afford to repay loans and will require lenders to report loans to a credit bureau-like entity to track the number of outstanding loans and the amount owed. .
The rules proposed by the Office of Consumer Financial Protection will not ban all payday loans, auto title loans or other high-cost loans. But they serve as the federal government’s first big blow to lenders who sometimes charge consumers nearly 400% interest and bury them in a bottomless hole of debt.
“The Office of Consumer Affairs offers strong protections to end the payday debt traps,” CFPB director Richard Cordray said in a written statement. “Too many borrowers looking for a short-term cash flow solution are struggling with loans they can’t afford and going into long-term debt. It’s a bit like getting in a fair taxi. to cross town and get stuck on a ruinous and expensive journey through the country.
“By putting in place traditional and common sense lending standards, our proposal would prevent lenders from succeeding by failing borrowers,” he said.
With payday loans, consumers can take out small, short-term loans (often for 14 days) in exchange for fees and high interest rates. A loan can be $ 500. Then it is repaid with the person’s next paycheck. If the consumer cannot afford to repay it because that paycheck is already incurred for other living expenses, the loan can be rolled over, with more fees and interest.
Supporters in the payday loan industry are expected to respond with strong comments when details of the new rules are known later today. The Community Financial Services Association of America, which represents non-bank lenders, says “payday loans are an important source of credit for millions of Americans who live paycheck to paycheck.”
The industry association notes that traditional banks are not adequately serving 24 million U.S. households that do not fit into the traditional, regulated banking system. More than 16 million households take out at least one personal loan each year. The CFSA also noted that a recent Federal Reserve report indicates that 47% of Americans cannot afford an unexpected expense of $ 400 without selling something.
“The rule proposed by the CFPB is a blow to consumers because it will cut off access to credit for millions of Americans who use small loans to manage a budget deficit or unforeseen expenses,” said Dennis Shaul , CEO of CFSA, in a statement. declaration. “It also sets a dangerous precedent for federal agencies developing regulations that impact consumers.”
The CFPB has developed numerous regulations that affect consumers. In this case, he asks interested parties and the general public to submit written comments on the proposed rule by September 14. The final regulations will be published at some point thereafter.
Federal restrictions on payday loans have been in place for over four years. “From the start, payday loans have been a high priority for the Office of Consumer Affairs,” said Cordray, who was appointed to his position in early 2012.
CFPB research shows that more than four in five payday loans are re-borrowed within a month. One in five payday loans go into default, and one in five single payment auto loan borrowers have their car or truck confiscated by the lender for default.
In 2008, the people of Ohio believed they had won a victory for consumers and, without question, those voters spoke loudly. But data from the Center for Responsible Lending also speaks loudly – about the subversion of the statewide consensus that Ohioans reached in 2008, a subversion uncontrolled by the legislature.
This will be Ohio’s second go-around with payday loan restrictions. Payday loans were legalized in Ohio in 1995, but complaints about fees, deceptive tactics, and interest rates of up to 391% have led to a crusade against them. In 2008, about 64 percent of Ohio voters approved retaining a payday loan reform law that capped interest rates at 28 percent. But payday lenders have found loopholes so they can continue to charge triple-digit interest rates, not just 28%.
US Senator Sherrod Brown, D-Ohio, said in an interview that he was “confident” that this reform will work where the last one failed. These rules will fill the gap and solve two major problems: First, ensure that payday loans are tracked in a database so that consumers cannot have multiple payday loans at the same time. Second, prevent loans from being renewed over and over again. Consumers have problems, Brown said, when they take out loans they can’t pay off in the short term and “the hole is too big to go out.”
“My mission is not to put them (the payday lenders) out of business,” Brown said. “My goal is for them to follow the rules.” He added that payday loans “meet a need” of some consumers.
Brown, the leading member of the US Senate Committee on Banking, Housing, and Urban Affairs, called predatory payday loans and auto title lending an “epidemic” costing Ohioans more than $ 500. millions of dollars in fees every year. Brown led a Senate effort last year calling on the CFPB to adopt tough rules. “I will fight against attempts to weaken these sane rules and make sure there are no loopholes that would allow lenders to continue exploiting struggling Ohioans,” he said.
The CFPB will announce details of its proposed new rules later today. Here are some of the expected arrangements:
- Lenders will be required to determine if the consumer can afford each payment when it is due while still being able to afford other financial commitments and basic living expenses. The test requires repaying everything owed, including fees, without borrowing more in the next 30 days.
- The number of short-term loans that could be made in quick succession would be capped.
- Lenders would not be allowed to offer certain short-term loans to people who have short-term loans outstanding or who have been indebted on short-term loans for more than 90 days in the past 12 months.
- Lenders could offer less restrictive loans if interest rates are capped at 28% and application fees do not exceed $ 20.
- Lenders should notify consumers in writing before debiting a payment from their bank account. And if two payments failed, the lender could not debit the account again without specific written permission.