For the past few years, criticism of the payday cash loan industry has been mounting. Opponents of payday loans have included celebrities, elected representatives and various consumer groups. However, since June 2, the topic has been extensively covered by national and local media, leading many to question why the issue of payday loans became so much more popular. The expanded coverage is primarily due to an announcement by the Consumer Financial Protection Bureau, or CFPB, that the agency has released its proposed new regulations for payday lenders. The new regulations are currently in the review stage, and the CFPB is accepting comments from the public regarding the pending rules for payday cash loans. Many people are not certain of the role of the CFPB or what it means when proposed regulations enter the review phase.
Why the CFPB Sent Proposed Rules for Payday Cash Loans to Review
The CFPB is an administrative agency, which means that it has been empowered by Congress to generate rules specific to the agency’s area of expertise. Unlike Congress, however, administrative agencies must allow time for the public to review each proposed rule and submit comments before the rule is finalized.
Examples of Administrative Agencies and the Origins of the CFPB
Administrative agencies are established by Congress to function as a lawmaking body with limited scope and powers. The Internal Revenue Service and the Environmental Protection Agency are two examples of administrative agencies. Although regulations passed by administrative agencies are not technically laws, they carry the force of laws once the regulations are finalized, which means that they can be legally enforced.
Reacting to the financial crisis of 2008, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The bill was sponsored by Sen. Christopher Dodd and Rep. Barney Frank, and the name of the act is usually referred to as simply Dodd-Frank. In its entirety, the bill is over 800 pages long and covers approximately 16 major categories of reform. Much of the bill deals with regulations for banks, investment firms and insurance companies, but one section focuses on consumer credit. The Dodd-Frank included the creation of the CFPB to protect consumers from abusive or unscrupulous practices by lenders and credit bureaus. Banks, payday loans, credit cards and most consumer loans fall under the CFPB’s control.
An Overview of the CFPB’s Proposed Regulations
The CFPB does not have the power to control the interest rates charged by lenders, but if the agency believes that lenders are charging fees or interest rates that are illegal or usurious, it can declare the lender abusive, unfair or deceptive. Much of the CFPB’s criticism of payday lenders was fueled by the calculation of an annualized interest rate for their loans. Although it is true that payday loans can carry a high annual rate, these loans are not intended to be repaid over a year or even several months. They are supposed to be very short-term loans that are repaid in 14 to 30 days. However, the CFPB discovered that some borrowers were renewing their loans repeatedly or obtaining multiple loans, making it difficult for them to ever be free of debt. To protect borrowers, the CFPB has proposed regulations to ensure that consumers who take out a payday loan will not fall into a cycle of debt.
The primary areas of change included in the regulations are as follows.
1. Lenders must determine whether borrowers will be able to make their payments when they are due and still meet their other financial obligations, including their living expenses. This is referred to as the full-payment test.
2. The proposed regulations also limit the number of payday loans that a borrower can obtain in quick succession.
3. For a short-term loan of less than $500, lenders may be able to approve a buyer who does not meet the full-payment test. However, borrowers who have owed short-term loans for more than 90 days during a rolling 12-month period or who have an outstanding balloon-payment or short-term loan cannot receive a new loan. Lenders would be allowed to offer up to two loan extensions, but only if a minimum of one-third of the total principal is repaid with each extension.
4. Lenders cannot accept the title to the borrower’s vehicle as collateral.
5. Lenders cannot attempt to collect payment by debiting the borrower’s account without first providing written notice. If two successive attempts fail, lenders cannot debit the account again unless the borrower provides a new authorization.
Responding to the New Regulations Proposed by the CFPB
Public comments will be accepted until Oct. 7, 2016.
The proposed rule has been posted to the Federal Register, and interested parties can submit a formal comment by clicking on the button near the title of the proposal. To submit comments by mail or email, follow the instructions provided under the link for alternative ways to comment that appears after clicking on the button to submit a formal comment. Comments from those with negative or positive personal experiences with payday lenders are especially valuable.
For Those Uncertain of the Advisability of the Proposed Regulations
The issue of regulating payday lenders is complex, and support for the proposed rules is divided. You can discover more information about this issue by visiting the Personal Money Store.