Payday loans and auto title loans face tough new crackdown
Payday loans will be severely restricted under new rules proposed today by federal regulators.
Primarily, the rules will require lenders to ensure consumers can afford to repay loans and will require lenders to report loans to a credit bureau-like entity to track the number of outstanding loans and the amount owed. .
The rules proposed by the Consumer Financial Protection Bureau will not ban all payday loans, auto title loans or other high-cost loans. But they serve as the federal government’s first big shot at lenders who sometimes charge consumers nearly 400% interest and bury them in a bottomless hole of debt.
“The Office of Consumer Affairs offers strong protections aimed at ending payday debt traps,” CFPB Director Richard Cordray said in a written statement. “Too many borrowers looking for a short-term cash solution are saddled with loans they can’t afford and go into long-term debt. It’s a bit like getting into a cab just to cross town and get stuck on an extremely expensive cross-country trip..
“By putting in place common sense, common-sense lending standards, our proposal would prevent lenders from succeeding by condemning borrowers to failure,” he said.
With payday loans, consumers can take out small, short-term loans (often 14 days) in exchange for high fees and interest rates. A loan could be $500. Then it is reimbursed with the person’s next paycheck. If the consumer cannot afford to pay it back because that paycheck is already incurred for other living expenses, the loan can be rolled over, with more fees and interest.
Payday loan industry supporters are expected to push back with strong commentary when details of the new rules become known later today. The Community Financial Services Association of America, which represents non-bank lenders, says “payday loans are an important source of credit for millions of Americans who live paycheck to paycheck.”
The industry association notes that traditional banks do not adequately serve 24 million American households that do not fit into the traditional, regulated banking system. More than 16 million households take out at least one personal loan each year. The CFSA also noted that a recent Federal Reserve report indicates that 47% of Americans cannot afford an unexpected $400 expense without selling something.
“The CFPB’s proposed rule is a terrible blow to consumers because it will cut off access to credit for millions of Americans who are using small loans to manage a budget shortfall or unexpected expense,” said Dennis Shaul, CEO of CFSA, in a writing. declaration. “It also sets a dangerous precedent for federal agencies developing regulations that impact consumers.”
The CFPB has developed many regulations that affect consumers. If so, he’s asking interested parties and the general public to submit written comments on the proposed rule by September 14. The final rules will be published at some point thereafter.
Federal restrictions on payday loans took more than four years to develop. “From the beginning, payday loans have been a significant priority for the Office of Consumer Affairs,” said Cordray, who was appointed to his position in early 2012.
CFPB research shows that more than four out of five payday loans are reborrowed within a month. One in five payday loans end up in default, and one in five one-time payment auto title loan borrowers end up having their car or truck seized by the lender for non-repayment.
In 2008, Ohioans thought they had won the consumer victory, and undoubtedly those voters spoke loud and clear. But data from the Center for Responsible Lending also speaks loud and clear — of the subversion of the statewide consensus that Ohioans reached in 2008, subversion unchecked by the legislature.
This will be Ohio’s second go-around with payday loan restrictions. Payday loans were legalized in Ohio in 1995, but complaints about fees, deceptive tactics, and interest rates as high as 391% led to a crusade against them. In 2008, about 64% of Ohio voters approved keeping a payday loan reform law that capped interest rates at 28%. But payday lenders have found loopholes so they can continue to charge triple-digit interest rates, not just 28%.
US Senator Sherrod Brown, D-Ohio, said in an interview that he was “confident” this reform will work where the last one failed. These rules will eliminate loopholes and fix two big problems: first, making sure payday loans are tracked in a database so consumers can’t have multiple payday loans at the same time. Second, prevent loans from being rolled over again and again. Consumers get in trouble, Brown said, when they take out loans they can’t repay in the short term and “the hole is too big to get out of.”
“My mission is not to put them (payday lenders) out of business,” Brown said. “My goal is for them to play by the rules.” He added that payday loans “fill a need” for some consumers.
Brown, the senior member of the U.S. Senate Banking, Housing, and Urban Affairs Committee, has called predatory payday lending and car title lending an “epidemic” that’s costing Ohios more than $500 million in fees every year. Last year, Brown led a Senate effort calling on the CFPB to pass tough rules. “I will fight attempts to weaken these sensible rules and ensure that there are no loopholes that allow lenders to continue to exploit struggling Ohios,” he said.
The CFPB will announce details of its proposed new rules later today. Here are some of the expected provisions:
- Lenders will be required to determine if the consumer can pay each payment when due while still being able to pay other financial commitments and basic living expenses. The test requires paying off everything owed, including fees, without borrowing more within the next 30 days.
- The number of short-term loans that can be issued in quick succession would be capped.
- Lenders would be prohibited from offering certain short-term loans to people who have short-term loans outstanding or who have been indebted on short-term loans for more than 90 days in the last 12 months.
- Lenders could offer less restrictive loans if interest rates are capped at 28% and application fees do not exceed $20.
- Lenders should notify consumers in writing before debiting a payment from their bank account. And if two payments fail, the lender can no longer debit the account without specific written authorization.