The effort to protect borrowers from payday loan lenders may backfire in states where laws regulating these lenders already exists. Short-term loans with high interest rates are facing a lot of government scrutiny. In fact, Georgia has banned them entirely. However, new payday loan regulations may weaken the rules of the states that have banned them.
Destabilizing State Regulations for Online Payday Loan Fronts
Regulatory bodies like the Consumer Financial Protection Bureau, or CFPB, has its eye on the payday loan industry because these lenders often charge excessive fees and high interest rates. When determining the annual percentage rate, or APR, for these loans, industry experts have found that borrowers are paying 300 percent or more a year. The high interest rates make it tough for borrowers to repay their loans.
Last summer, the CFPB proposed a list of regulations. While most of the agency’s rules protect consumers, there are gaps that could be harmful. Meanwhile, consumer groups that are based out of Georgia are expressing concerns that the agency’s regulations could have the opposite effect of reining in the lenders of online payday loans.
Liz Coyle, the executive director of Georgia Watch, said, “Dangerous loopholes in the proposed rule could provide payday lenders a license to creep back into our state, eroding protections developed through decades of work that save Georgia consumers millions of dollars each year.”
Georgia Banned Payday Loans Years Ago
According to the Georgia Department of Law, legislators made it illegal for lenders to offer payday loans decades ago. These types of loans are usually for around $500, and when borrowers take them out, they do so for a week or two. To recoup the loan, lenders often withdraw the money automatically from the borrower’s checking account.
Payday loan lenders are a clever bunch, so despite the ban against the industry, many of them found ways around the rules. Because they were successful, lenders in the state flourished; at least, they did until 2004. That year, Georgia cracked down on the ban by adding prison sentences of as long as 20 years for those who were caught and found guilty of lending payday loans.
What Are Critics of the Proposed Federal Regulations Saying?
According to those who oppose the federal regulations that the CFPB is suggesting, the new regulations will permit lenders to charge borrowers excessively high interest rates on as many as six loans in a 12-month period before the ability-to-pay law goes into effect. This law requires lenders to verify whether a borrower can repay a loan.
Along with this, the proposed rules exempt six loans with interest rates of 400 percent or less from the ability-to-pay regulation entirely. Critics are pointing out that the rules fall short of protecting consumers fully because the regulations don’t recognize states’ caps on payday loan interest rates.
Credit Counseling Agencies Have Reservations Too
More than 75 credit counseling agencies across the nation are raising concerns about the CFPB’s payday loan regulations. These groups acknowledge that the proposals are well intentioned. They also recognize that the agency is trying to end predatory lending in states where payday loans are permitted. However, like critics, credit counseling agencies are spotting loopholes in the proposed regulations.
Clarifi reports that a number of groups including military veterans, civil rights organizations, faith leaders, labor organizations and affordable housing providers came together to write a letter expressing their dissatisfaction with the proposed rules. In the letter, they wrote, “We believe a weak CFPB rule will directly jeopardize our states’ usury and other relevant consumer protection laws.”
The groups are also protesting the governing of payday loans online nationally instead of permitting each state to enact its own set of rules. Markita Morris-Louis, Clarifi’s Senior Vice President of Community Affairs and General Counsel, said, “Payday lenders target our most vulnerable communities and issue bad loans with an average interest rate of 400 percent. In many cases, borrowers have to take on additional loans to pay off existing loans and become trapped in a cycle of debt.”
The CFPB’s Proposals will Strengthen Some State Laws
Georgia’s rules for the payday loan industry has a gap, and it seems that the CFPB’s proposals will close it. The state’s felony loan law only applies to lenders who issue small, short-term loans that are due by a borrower’s next payday. Georgia’s law does not extend to car title loans. According to the state, car title loans fall under a separate set of regulations that includes pawn loans. However, the CFPB’s regulations will get started to these loans as well as to payday loans.
The agency has already flexed its regulatory muscle against the industry. Earlier this year, the CFPB hit one of the country’s largest car title lenders with a $9 million fine. The agency accused the lender of deceptive loan practices involving the cost of its loans. According to the CFPB, the company failed to disclose to borrowers that some of its loans have annual interest rates that are more than 300 percent.
The car title lender didn’t acknowledge whether it was guilty or innocent, but it did say that it has been cooperative and opened up its business practices to the CFPB. The company also stated that it has modified its lending practices to ensure that they’re in line with the agency’s concerns.
So, What is the CFPB Proposing?
When the CFPB developed proposals against the lending industry, it had both long-term loans and ones with short terms in its crosshairs. According to Regulations.gov, lenders will be obligated to confirm a borrower’s net income and whether he or she earns enough to afford the loan payments in addition to his or her basic expenses.
The agency also wants to crackdown on how payday lenders recoup the money that they lend. Under the bureau’s list of proposals, lenders will not be permitted to make more than one attempt to withdraw a payment automatically from a borrower’s checking account.
Acknowledging the Need for Bad Credit Payday Loans
When it comes to payday loans online, industry experts and even the CFPB acknowledge that there is a need for them in this country. The agency reports that in 2013, 4.2 million households took out a payday loan. Another survey commissioned by the bureau found that 4 percent of households used one, so while the high cost of these loans need to be curtailed, the bureau shouldn’t restrict them to the point where people don’t have access to them.
Is It Back to the Drawing Board for the CFPB?
Because the new payday loan regulations may weaken the ones established by some of the nation’s states, the CFPB should consider modifying the laws that it intends to enact. While the agency certainly seems to have the financial well-being of borrowers in mind since it’s trying to prevent them from taking out bad credit payday loans, it shouldn’t do so by undermining the regulations put in place by the states. To learn more about how the CFPB could weaken state laws across the nation, visit the Personal Money Store.