Federal Regulators Begin Reign of Terror on the Payday Lending Industry
With the Consumer Financial Protection Bureau, or CFPB, gearing up to enact its reign of terror on payday lenders, some companies are digging in their heels while others are bailing out. The agency spent more than four years completing studies and listening to industry experts to decide what regulations to put in place.
Change is on the Way
While the CFPB has yet to finalize the details, there are regulation rumors flying around. According to Bloomberg, the agency intends to stop borrowers from taking on short-term loans that they are unable to repay. When people fail to repay these loans on time, fees begin to accumulate increasing the balance of the original loan. Payday loans are temporary cash advances that borrowers promise to repay by their next payday. To support the promise, most companies require them to write a postdated check.
CFPB’s regulations will also affect companies that provide similar borrowing services. This includes installment and title loan companies that offer lengthier repayment periods. These lenders provide emergency funds on the contingency that they gain access to the borrower’s bank account to withdraw the repayment automatically on the due date even if the person doesn’t have the funds available.
The senior researcher for the Center for Responsible Lending, Robin Howarth, said, “These debits result in numerous nonsufficient fund fees and other penalties such as bank overdraft charges on top of the high interest rates assessed on the loans.” Lenders state that the CFPB will kill their industry and those like it. If the agency succeeds, then borrowers with limited options will be harmed.
What do Consumers Want?
Despite the fees and interest that can accrue, a number of consumers report that they need access to emergency funds. The Consumer Financial Services of America, or CFSA, which is a trade organization that represents payday loan lenders, completed a poll that featured 1,000 loan borrowers. In the survey, the CFSA found that those who borrow funds from payday loan lenders view the services that they offer more positively than people who turn to other types of lenders. Most survey participants confirmed that payday loans “can be a sensible decision to get needed cash when faced with unexpected expenses.”
Survey participants also agreed that these loans are often more affordable than funding alternatives or late payment consequences. They further confirmed that if the CFPB enacts a set of onerous rules against these lenders, then it would take away the chance for many people to make the kind of financial decisions that will help them manage their personal finances.
Will Payday Loan Lenders Go out of Business?
According to an article in New Brunswick Today, the CFPB is aware that its new regulations are likely to put a number of payday loan lenders out of business. In fact, the agency turned to 25 of the nation’s biggest retail banks and asked them to establish low risk deposit accounts to help people avoid overdraft fees. If the banks agree, then many of the country’s 10 million households without bank accounts will be able to enter the system. With the CFPB stepping in to give people access to checking accounts, the agency is clearly considering contingency plans for consumers who have few loan options.
The CFPB states that its new rules should promote greater loan affordability for borrowers. Consumer advocates are spurring the agency to enact strict rules that include requiring lenders to verify a person’s income, credit history and current expenses before issuing a loan. With this regulation in place, emergency loans may become outmoded due to the longer verification process.
Because credit reports will be a factor in these loans, the CFPB notified banks and credit unions that they must meet accuracy requirements when they file a negative account history against someone. The failure to meet accuracy obligations could result in legal action.
Meeting a Need
According to key players, the payday loan industry constantly evolves to serve the nation’s customers and their preferences better. Major financial institutions have mainly ignored the needs of consumer groups with poor credit histories and limited finances. The short-term loan industry meets this need.
The CFPB’s goals of protecting consumers is well intentioned. However, the agency may be inadvertently harming those it aims to help. Dennis Shaul, the CFSA’s chief executive, said, “The CFPB has not addressed the reality that its new regulations will restrict access to credit for the millions of households that use payday loans to responsibly manage budgetary shortfalls and unexpected expenses.” The CFPB has reported that it intends to finalize new regulations for the industry this year. To read more about the reign of terror that the CFPB has in store for the payday loan industry, visit the PersonalMoneyStore.com.