There are new regulations coming that aim to help borrowers from becoming entrapped by payday loans. The rules, brought about by the Consumers Financial Protection Bureau, provide long-needed protections for people who fall into desperation and risk excruciatingly high interest rates to borrow money so that they can pay their bills.
Of course, everyone is not happy about the changes, which won’t take effect until July 2019. Advocates for the payday loan industry, which took in $3.6 billion in fees in 2015, say that the lenders play a vital role in helping people wouldn’t otherwise qualify for a loan make ends meet.
But the Consumers Bureau, which is run by Richard Cordray, an Obama Administration appointee, says in a summary of the new restraints that it has identified "as unfair and abusive the practice of making or increasing the credit available" to a borrower "without reasonably determining that consumers have the ability-to-repay the loans according to their terms."
For years now, payday lenders – who loan people money on the premise that it will be paid back in a really short time (like on an upcoming pay day) – have had something close to free rein in the short-term lending business. Exorbitant interest fees charged to borrowers have threatened to make the industry nothing short of a racket, critics say, with some borrowers having fallen into deep financial troubles after being hit with triple-digit interest rates.
But what exactly is all the fuss about and how are consumers really affected?
- Prevent overborrowing: Once a consumer has borrowed three times in a 30-day period, a mandatory 30-day "cooling off period" kicks in. During this time, the consumer won't be allowed to borrow unless at least a third of the previous outstanding loan has been satisfied.
- Mandate income verification: Believe it or not, many payday lenders don't check to see what a borrower's monthly income is — they don't have an incentive to. If you don't pay up, your collateral — in many cases, your car — will become theirs. With the new rules, lenders must verify the consumer's net monthly income and the amount of payments required for the consumer's debt to be paid.
- Control payment withdrawals: Gone will be the days when a lender can continue to hit up your zero-balance account, triggering those insufficient funds charges. The new rules state that lenders must provide a written notice before a first attempt to withdraw payments for a loan from a consumer's account. When two consecutive withdrawal attempts fail, the lender must get permission again from the borrower to attempt another withdrawal from the same account.
Drafted in 2013, the regulations on payday loans have been somewhat of a tentpole of Cordray’s tenure, which doesn’t officially end until next summer, but may well expire before that. He is reportedly taking a serious look at running for governor in Ohio in 2018.
The Consumer Financial Protection Bureau, created in the wake of the 2008 financial meltdown, has scored a number of crucial victories in its short life span.
Democrats, who have championed the agency – especially Sen. Elizabeth Warren of Massachusetts – say the bureau has saved consumers upward of $12 million in refunds and other relief, including gaining them the right to file class-action lawsuits against companies rather than handle cases individually, the Los Angeles Times reports.
So when the rules go into effect, will the payday loan industry go belly-up? Hardly, says Dennis Shaul, CEO of the CFSA industry group. He told CNN Money that while payday lenders only make "an average of 4% return on investment," they will adjust to the times by likely offering new products that meet new government standards. "We're not making an obscene profit on the backs of people," he was quoted as saying.
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