Feds Eyeing a Crackdown on Predatory Payday Lenders
By Burt Carey
The federal Consumer Financial Protection Bureau is proposing new regulations designed to place limits on excessively high-interest loans issued by short-term lenders.
The CFPB proposal would require so-called payday lenders to prove borrowers have an ability to repay a loan by the time it comes due – usually by the borrower’s next pay period – without having to renew the loan or take out a new loan to pay the old one off.
Lenders would also be required to provide borrowers with additional warnings before they can debit money from their bank account, and would be limited in the number of times they can attempt bank account debits. In a CFPB study published last year, the agency discovered that payday lenders attempting to debit borrowers’ bank accounts caused borrowers $185 on average in overdraft fees and bank penalties.
Automobile titles would also no longer be allowed as collateral. That part of the CFPB proposal would eliminate that segment of the industry that uses auto titles on which to base consumer loans.
Consumer protection groups are applauding the efforts by the CFPB to curtail an industry that typically charges up to 390 percent interest on low-dollar loans, and 300 percent on auto-title loans. Some say the proposed regulations don’t go far enough.
“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” CFPB Director Richard Cordray said in a prepared statement. Cordray compared a typical payday loan transaction with getting into a taxi for a cross-town ride only to discover that you’re on a “ruinously expensive” cross-country trip. Cordray said the CFPB proposal would prevent lenders from succeeding by setting up borrowers to fail.
The new regulations would require lenders to conduct a full-payment test before a loan can be made. If, for example, a $500 loan and its interest payment cannot be met with the borrower’s next paycheck, the loan cannot be approved. Payday lenders would also be required to give borrowers a minimum of three days’ notice before debiting their account. If a lender tries to collect the money for the loan twice unsuccessfully, the borrower must give them written authorization before another attempt can be made to debit their account.
The proposed regulations, says Community Financial Services Association of America CEO Dennis Shaul, would prevent access to money to millions of Americans. “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,” he said. The CFSA is a trade group representing the payday loan industry.
Public comments on the CFPB proposals will be taken until Sept. 14.
Source: Baret News