How New Regulations Could Change the Payday Loan Industry Forever
The Consumer Financial Protection Bureau, or CFPB, has proposed drastic new guidelines that could change the payday loan industry forever. Key features of the guidelines include the following points:
- Full-Payment Test
Customers must be investigated to see if they can afford to make the full payment as promised from a single paycheck. Lenders would also be required to run credit checks and find out if borrowers have other short-term loans.
- Ending Revolving-Door Cycles of Debt
Lenders could no longer approve a second loan within 30 days of paying off a previous short-term loan.
- Limiting Penalties and Fees
There would be limits to how many times a lender could try to debit a customer’s bank account.
- Capping Interest Rates
Interest rates would be capped at 36 percent.
The CFPB has also proposed creating a new credit reporting agency for the payday lending industry to ensure that customers can afford to repay their loans and that they don’t take out multiple loans from different lenders. The agency would also report defaults and late payments, and conscientious borrowers could improve their credit scores by making their payments as agreed.
Payday Lending Faces Big Changes Due to CFPB Regulations
According to a Money.cnn.com report, the average borrower of payday loans spends $520 in fees to borrow $375 and takes about six months to repay the obligation. Some of these charges are bank service charges that are assessed for multiple presentations of online checks. Under the new regulations, payday lenders would be required to furnish written notice three days or more before attempting to collect payment from a borrower’s checking account. Debit requests could only be presented twice without obtaining written approval to debit the account again.
Payday Loan Industry’s Response to Proposed CFPB Regulations
The payday lending industry faces one of the most confusing set of mixed signals that have ever challenged business planners. High default rates and short periods to earn interest make it nearly impossible to offer short-term loans at competitive interest rates when those rates are compared to long-term loans. The CFPB has proposed a new credit reporting agency to gauge borrowers’ creditworthiness and abilities to repay their loans, which could reduce default rates. However, even the banking industry has stated that it can’t offer short-term loans at the low rates the CFPB is recommending.
Despite political criticism and legitimate concerns that some consumers get caught in debt traps, borrowers support the industry and give it high marks for providing excellent customer service and someplace to turn when financial emergencies arise according to another Money.cnn.com report. Possible scenarios for the evolving payday loan industry after reform include offering installment loans for longer periods, decreasing the number of loan approvals, implementing nonrefundable application fees, offering other financial products and investing in other business models. Many of these kinds of reforms were implemented in Colorado in 2010 by offering six-month installment loans at interest rates that were two-thirds lower than average payday lending rates.
Politicians and Industry Officials Issue Statements on Payday Lending Reform
One of the biggest criticisms of payday lending has always been that the lenders target low-income and poorly educated people who are more likely to fall into debt traps. However, according to a Cfsaa.com report on short-term borrower demographics, most payday loan borrowers earn mid-level incomes between $25,000 and $50,000, and 90 percent of them have high school diplomas or college degrees.
CFPB director Richard Cordray commented, “Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt.” However, Republican presidential nominee Donald Trump and other Republicans want to abolish the CFPB and strip the federal government’s power to regulate payday lenders and other financial institutions according to a Morningconsult.com report. Democratic presidential nominee Hillary Clinton stated, “Abusive payday lenders have for too long been a drain on the resources of families in need…” Clinton and other Democrats–including Elizabeth Warren who pushed strongly for creating the CFPB–support reforms that are designed to abolish payday lending in its current form.
Industry spokesperson and Online Lenders Alliance President and Chief Executive Lisa McGreevy commented,“At a time when consumers are demanding choices for flexible, responsible credit products, we’re very concerned that this initial proposal could severely restrict their options. This proposal is complex and we are concerned that it will unnecessarily confuse consumers. OLA has set industry-leading standards and best practices that ensure customers have access to the most innovative and responsible products in the market. We will continue to work with the CFPB to help shape this rule so that it preserves the innovation needed to meet the growing consumer demand online, and ensures that customers are fully informed and fairly treated. We also hope that the CFPB will listen to the customers who use these products.”
Building a New Short-Term Loan Industry Raises Many Questions
If the proposed measures are passed and become law, the face of payday lending could change dramatically. Some borrowers wouldn’t be able to get loans at all, and everyone would experience longer processing times. Smaller loans might not be offered unless financed for six months or more. Nonrefundable processing fees might be required, so the short-term loan industry could become radically different. Banks and traditional lenders might start offering these types of loans, or the prime interest rate could rise and make it impossible for any company to offer short-term loans within the guidelines. Get the latest information about payday lending and the CFPB’s attempts at regulating it by visiting the PersonalMoneyStore.com.