CFPB announces proposed rule to curb 'payday debt trap' lending to consumers
Short-term “payday loans” can potentially be a real benefit to individuals like John Charette. The 47-year-old Maine man, like many Americans, has bad credit and lacks savings.
So he took out a $250 payday loan in Portland to update his vehicle registration, knowing that a ticket would cost him even more, the Associated Press reports.
However, the $38 billion industry is costing too many Americans far more than they can afford, with interest rates that can reach 300 percent annually, or even more, a federal watchdog says. That is especially true as loans are rolled over into new debt if they can’t be repaid by the original due date, which, often, is when the debtor gets his or her next paycheck.
So in recommended regulations on “payday debt trap” lending announced Thursday, the Consumer Financial Protection Bureau is suggesting a significant clampdown on those who provide payday loans, vehicle title loans and certain installment loans.
Among the changes it is seeking in a complex proposed rule are requirements that lenders investigate whether customers can afford to repay loans; and restrictions on rolling over loans, on penalties that can be imposed and on the debiting of customers’ bank accounts for amounts claimed to be due, according to CNN Money and the Wall Street Journal (sub. req.).
Saying that the loans serve a useful purpose, industry advocates point to a Bankrate.com survey earlier this year that found only 37 percent of American adults have saved enough money to cover a $500 car repair or a $1,000 medical bill.
Even some who favor more regulation are concerned that the proposed CFPB regulations will discourage banks from entering the small-loan market with overly onerous requirements, the newspaper says.
The CFPB disagrees.
“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” director Richard Cordray said in a Wednesday written statement. “It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”
A final version of the rule will follow a 90-day comment period.
Related coverage:
ABAJournal.com: “Delaware Chancery Court voids ‘unconscionable’ payday loan, awards borrower damages”
See also:
ABAJournal.com: “CFPB seeks to ban mandatory arbitration of consumer disputes over banking, credit cards and loans”
