A New Credit Bureau Is Born for Payday Loans

The Consumer Financial Protection Bureau, according to Blog.credit.com, has defined the rough outline of a proposed new credit bureau for short-term and payday loan borrowers and lenders. This proposal has stunned many payday loan critics because the proposal could be viewed as acknowledging the industry instead of suppressing it, which has been the direction that the CFPB’s previous efforts have taken. Federal regulators are trying to limit payday loans, and the newest CFPB proposal provides a blueprint for establishing a credit bureau to limit the conditions under which payday loans can be granted.

Traditionally, the major credit reporting bureaus don’t report on payday loans, follow whether they’re repaid in a timely manner or report payday loan defaults. Ostensibly, the new bureau would correct these oversights, which could reduce payday loan default rates, help people who repay their payday loans earn higher credit ratings and prevent some of the abuses that critics charge the industry with perpetuating.

Proposed Payday Loan Credit Bureau Could Be a Game-Changer

The CFPB proposal could prove to be a game-changer despite being saddled with the name “Registered Information System.” However, the initials “RIS” could become as commonly known as Experian, Equifax and TransUnion. The proposal would allow payday borrowers to build their credit histories, demonstrate creditworthiness to other companies and graduate to more traditional lending products. Of course, the downside is that payday loans would probably take longer to process because lenders would have to make “reasonable determinations” about whether consumers could afford to repay their loans from a single paycheck or afford the payments for installment-type loans.

Other potential game-changers of the proposal include adding more people to the rolls of credit scores and credit reports. Many people don’t participate in the credit economy, and the new RIS agency would be able to gather broader information about people. This could have both negative and positive effects given that many people hide illegal income from gambling and criminal activities, but the reports could boost credit ratings for people who legitimately work and repay their debts. Experian.com conducted a study that found adding utility and rent payment information to credit scores would improve credit scores of 20 percent of consumers– which is enough to lift them from subprime status to prime borrowers. The payday lending data could provide similar benefits for people who are struggling with poor credit ratings or no previous credit histories as reported to the major bureaus.

Why Critics Want Changes to Payday Loans

Criticism of the payday lending industry has long included mentions that payday loans don’t impact your credit score, that payday lenders don’t check whether people can afford to repay their loans and that many companies present unpaid bank debt authorizations too many times, which jacks up service charges that borrowers must pay or risk losing their bank accounts. Critics also point to people who take out multiple payday loans to cover their living expenses, which traps them in cycles of debt. The CFPB’s creation of a payday lending bureau should eliminate these charges against the industry because lenders will be forced to check on how many loans borrowers are getting and whether they can really afford to repay them.

Proposed Rules of the New Credit Reporting Bureau

The rules are designed to limit the credit granted to people who can’t afford to repay their short-term or traditional installment loans according to Mondaq.com. The five major components of the proposal include:

  1. It’s unfair to grant credit with terms that borrowers cannot afford.
  2. Lenders would be required to collect substantial ability-to-repay information.
  3. In situations where people can’t afford their payments or are conditionally exempt, loans can’t be granted.
  4. Lenders can present requests for payments to banks only twice unless they obtain new authorizations, which prevent multiple service charges from accruing against borrowers’ bank accounts.
  5. Information about the loan and its payment or nonpayment must be furnished to a consumer credit reporting agency.

Bureaucrats are struggling to grasp the complexities of the proposal because some issues are difficult to define. Short-term or payday loans are defined as loans with repayment periods of 45 days or less. Longer term installment loans that are subject to the new reporting procedures include those that are for more than 45 days but have interest rates higher than 36 percent.

Broad Rules of the CFPB Proposal Could Affect a Range of Lenders

Even traditional lenders would be subject to these rules, so credit card companies, student loan lenders and mortgage financers are studying the proposed changes to see how they might impact their businesses. The ability-to-repay determination requires substantial underwriting expertise, and many of the proposed conditions could affect other credit reporting agencies and lending products. The specific language is left intentionally vague by employing such terms as lenders making “reasonable” determinations, which could open the floodgates of complex new reporting and underwriting requirements that are to be defined at a later time. Find out more about the proposed credit bureau for payday lenders at the PersonalMoneyStore.com.