The payday lending industry heaved a collective sigh of relief yesterday. The Consumer Financial Protection Bureau proposed the weakening of Obama-era payday lending rules that required lenders to assess borrowers’ ability to repay. They also limited the number of times a lender could try to withdraw money from a lender’s account to two.
Major victory for payday lending industry
These payday lending rules were set to take effect in August. The CPFB wants to nix them both in the bud.
This is a major victory for payday lenders, many of which who were at risk of having to close shop.
Tightening eligibility requirements would remove the target audience of payday lenders from the market. Few people will agree to payday lending rates if they have an emergency fund or the credit to apply for better terms. Although it is not always obvious how much a payday loan costs. Find out how to calculate the APR of a payday loan here.
91% of payday loans are made to borrowers who borrow from payday lenders five or more times a year.
The new rule would require lenders to check credit reports and verify income before approving a loan. This would have dramatically increased the processing costs of small short-term loans. The median loan amount for payday lenders is just $350. Limiting the number of times a lender could collect payment from a borrowers bank account also endangered the payday business model.
Consumer advocates fear vulnerable consumers will pay the price
Consumer advocates claim the CFPB is hurting the most vulnerable consumers. According to the Center for Responsible Lending, 91% of payday loans are made to borrowers who are caught in a cycle of debt and borrow from payday lenders five or more times a year.
Industry representatives feel the roll back of the payday lending rules doesn’t go far enough. Dennis Shaul, chief executive of the Community Financial Services Association of America, which includes Check City, Check Into Cash, Advance America, and Speedy Cash, claims other payday lending regulations “suffer from the lack of supporting evidence and were part of the same arbitrary and capricious decision-making of the previous director.”
Are payday loans evil?
Should the CFPB ban them altogether? Does it ever make sense to take on a payday loan? This is a controversial subject that is easy to oversimplify. This article provides some context.
Payday loans are very expensive. They only make sense as a one-time loan to avoid a late payment or pay for an emergency expense. However, if you don’t have credit and you don’t want to borrow from friends or family, you may feel there is no other option.
The good news is that most people don’t need to settle for a payday loan. If you know where to look, you can probably find a personal loan with much better rates and terms.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.