payday loans targetted CFPB

Federal Regulator Targets Payday Loans

Four out of five payday loans are rolled over or renewed within 14 days, according to research by the Consumer Financial Bureau. The same report indicates that those who get a payday loan every month are much more likely to stay in debt for 11 months or longer. It’s no surprise then that paydays loans are under increasing scrutiny. Payday loans have long been in the crosshairs of federal regulators. However, the efforts to either make them illegal or cap the interest rates they charge have increased in the last year.

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Consumer Financial Protection Bureau Warning Shots

The next big move against payday loans is coming from the Consumer Financial Protection Bureau. The CFPB has proposed new rules that would limit the number of times a lender can withdraw money from a borrower’s account without reauthorization after two unsuccessful attempts. This will limit the charges borrowers have to pay to their bank and may reduce the number of automatic payday loan rollovers. The CFPB also wants to require payday lenders to ensure customers have the financial ability to repay a loan before they can offer them a loan. These rules are expected to be in place by the end of 2017. While providing testimony before the Senate on June 11th, 2014, CFPB Director Richard Cordray stated that payday regulation was “of extreme importance to the Bureau.” He wasn’t kidding. Cordray explained that delays in creating comprehensive payday regulations were motivated by a desire to make sure the rules proposed are not “made a mockery of” and circumvented by payday lenders, as it has occurred with the Military Lending Act. 

If you are not one of the 12 million Americans who use payday loans, you may wonder how that is even possible. Find out how payday loans work.

The Military Lending Act Failure

The Military Lending Act capped conventional payday loans with a maximum interest rate of 36%. However, many payday lenders have circumvented the law by offering open-end payday loans, which aren’t restricted by the MLA. An open-end payday loan is practically the same as a conventional payday loan. If anything it is more dangerous because borrowers can repeatedly borrow without approval necessary. There is no fixed term to repay, and the charge is based on how much you owe. In a nutshell, they are credit cards with payday loan interest rates. Scary stuff. 

State Regulations

Federal regulators are not the only government authorities interested in banning or regulating business payday loans. Although 32 states authorize high-cost payday lending, 18 states either prohibit it or cap the interest rates they are allowed to charge. 

Arkansas, for instance, passed a ballot in 2010 that capped the interest rate on payday loans to the equivalent of 17% APR. Needless to say, most of the payday lenders in Arkansas either closed shop or moved to another state. 

However, even bold measures like that of Arkansas can’t stop payday loans. As Jim DePriest, deputy attorney general of Arkansas reported to the Chicago Tribune, the de facto banning of payday loans has caused an increase in online payday loan complaints. One example DePriest likes to mentions is that of a client of online payday lender, who received repeated phone calls from CashYes demanding more payments after she had already paid $3,193.75 on a $775 loan! Examples like that of CashYes show the need for a federal regulation that has jurisdiction over storefront and online payday lenders.

So what is the Consumer Financial Protection Bureau doing about payday loans? Director Cordray has made it clear that reining in predatory lending remains a central focus for the CFPB. 

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Payday Loan Renewals

Nonetheless, the CFPB is not intent on banning all payday loans. Director Cordray pointed out that 48 percent of new payday loans were paid with either one or no renewals and that “some [payday] loans should be available. What does concern the CFPB is that all too often payday loans lead to a perpetuating sequence, that often push their APR into the 300% to 1,000% APR range.The CFPB has already begun taking measures to restrict predatory lending, including placing requirements on lenders to ensure borrowers can afford their loans. 

Is this the end of payday loans? Will it be just another failed attempt to regulate them? Or will legislators succeed at finding a middle ground that protects borrowers and still gives payday loans a role to play in the U.S. credit marketplace? It’s unclear now but one thing is clear: the payday loans business model could change in the next 12 months.

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