The Consumer Financial Protection Bureau on Thursday released a final version of its payday loan rules. “The new CFPB rule puts an end to the payday debt traps plaguing communities across the country,” said CFPB director Richard Cordray. “Too often, borrowers who need cash quickly find themselves trapped in loans they cannot afford.”
The CFPB issued the rule after studying payday lending practices for five years; this published a rule proposal in June 2016, which received over a million comments online and has been revised in its current format.
The goal: To break a “cycle of taking on new debt to pay off old debt,” wrote the CFPB.
It will regulate loans that require consumers to pay off all or most of their debt at one time, including payday loans, auto title loans and loans. “advance deposit” products, which typically work by withdrawing the repayment amount from the borrower’s next direct electronic deposit.
Some 12 Million Americans Take Payday Loans Every Year, according to the nonprofit Pew Charitable Trusts, a Philadelphia-based nonprofit. But these consumers also spend $ 9 billion in loan fees, according to Pew: The average payday loan borrower is in debt for five months of the year and spends an average of $ 520 in fees to borrow repeatedly 375 $. (And they don’t help borrowers build credit like other options do.)
Nearly 70% of payday loan borrowers take out a second loan within one month of their last, according to a CFPB study. While some praised the rule, others backed down and said consumers will have fewer options when they are in dire financial straits.
Here’s what the new rule will mean:
New rule outlines new restrictions on payday loans
There are some 16,000 payday loan stores in 35 states that allow payday loans, the CFPB said. Due to certain state laws, payday loans are already effectively illegal in 15 states.
The new rule requires lenders to perform a “full payment test” to determine if the borrower can make loan repayments. To complete this test, the potential borrower will need to show proof of income.
It also limits the number of loans consumers can get; they can only get three loans “in quick succession”. Lenders will be required to use CFPB registered credit reporting systems to report and obtain information on these loans.
There are certain conditions under which borrowers are exempt from some of these rules.
Consumers are allowed to take out a short-term loan of up to $ 500 without going through the full payment test, if the loan is structured so that the borrower makes gradual payments. This is called the “principal payment option”. But these loans cannot be given to borrowers who have recent or current short term or lump sum loans.
Loans that the CFPB considers “less risky” to consumers do not require the full payment test, nor the “principal repayment option”. Those that are “less risky” include loans from lenders who provide 2,500 or fewer short-term or lump sum covered loans per year and do not derive more than 10% of the income from these loans. These are usually small personal loans from community banks or credit unions, the CFPB said.
After two consecutive unsuccessful attempts, the lender can no longer debit the account without obtaining a new authorization from the borrower.
The reaction to the new rule
Some consumer advocates have praised the new rule.
“The CFPB’s action today is a major step towards ending the predatory practices that drive borrowers to disaster,” said Joe Valenti, director of consumer finance at the Center for American Progress, a policy organization Washington, DC-based leftist public in a statement.
The final version of the rule is “a major improvement on the proposal” originally developed by the CFPB, said Alex Horowitz, senior research manager for The Pew Charitable Trusts. “It is designed to cover the most damaging loans while still providing consumers with access to credit.
But Dennis Shaul, CEO of the Community Financial Services Association of America, a trade group that represents non-bank lenders, called the rule “a terrible blow to more than a million Americans who have spoken out against it.”
Where will desperate consumers go instead of payday loans
Richard Hunt, president and CEO of the Consumer Bankers Association, a trade group for retail banks, said the rule could lead needy consumers to other poor alternatives, including pawn shops, lenders offshore, high-cost installment lenders, or unreliable “flyovers”. night lenders.
But Brian Shearer, an attorney-adviser for CFPB, said the office had researched states where payday loans are illegal and determined that this should not be a major concern.
Horowitz of Pew Charitable Trusts said banks and credit unions would likely increase their low dollar loan offerings if “regulators let them do it,” which could save borrowers money. that they paid to borrow payday loans.
Banks are “keen to extend their reliable and responsible service offerings to these borrowers,” said Virginia O’Neill, senior vice president of the regulatory compliance center for the American Bankers Association, a business group.
How the rule will be applied
State regulators will apply the new CFPB rule, if it comes into effect, along with the CFPB.
The final version of the CFPB rule must be published in the Federal Register, a government publication. Once it is, it will take effect 21 months later. But according to the Congressional Review Act, Congress can pass a joint resolution disapproving the rule, which would prevent it from coming into force.
“Congress should not side with the payday lenders on this point,” Horowitz said. “If Congress is to play a role here, it should tell regulators of banks and credit unions to provide guidance for small installment loans. They shouldn’t overturn this rule.