Regulatory Outlook for the Payday Loan Industry
The Consumer Financial Protection Bureau, or CFPB, made an announcement about a year ago regarding the lending practices of the payday loan industry. Last year, the agency issued a report that included a list of proposed restrictions for short-term loans, long-term loans and the industry’s collection practices. The director of the small dollar loans project for Pew Charitable Trust, Nick Bourke, said, “What their rulemaking will do is say that wherever a loan exists, it has to be fair and transparent.”
The Consumer Financial Protection Bureau Payday Lending Proposals
The CFPB is considering requiring lenders to verify a borrower’s income before they can approve a loan. The government organization may also limit the number of loans that one consumer can take out during a set timeframe. Richard Cordray, the director of CFPB, said, “After much study analysis, we are taking an important step toward ending the debt traps that are so pervasive in both the short-term and long-term credit markets.”
Proposals for Short-Term Loans
The financial protection agency may establish a policy that defines a “short-term loan” as one with a 45-day duration. With this type of loan, the lender would be required to verify income, whether the person has additional outstanding debt and his or her credit history for repayment confirmation purposes.
The agency is further proposing a cooling-off period for borrowers. This period would last for 60 days. However, additional loans could be approved within this timeframe if the lender could prove that a borrower’s finances had majorly improved. Despite this exception, the agency would restrict lenders from making more than three payday loans with bad credit to one borrower during a 60-day period.
Short-term loan lenders may gain the option of selecting consumer protection regulations that would control the number of loans that a borrower could take out consecutively. In addition, lenders must offer affordable repayment terms.
The regulatory outlook includes the proposal that loans taken out for less than 45 days cannot exceed $500. Another part of the proposal states that when lenders provide loans with repayment terms that are shorter than 45 days, they cannot use a borrower’s vehicle for collateral or include more than one finance charge.
Capping rollovers to two with a maximum of three total outstanding loans and requiring lenders to provide affordable repayment terms are other regulations that are on the CFPB’s list. If the agency decides to cap rollovers, then lenders would have to offer financially strapped borrowers the option of a principal reduction on their three loans or a way to avoid additional fees.
Proposals for Loans with Longer Terms
In most cases, when the CFPB discusses long-term loans, the agency is referring to loans with lending terms that last longer than 45 days. These loans generally allow the lender to access a borrower’s paycheck or deposit account. This type of loan may include terms that give the lender partial ownership of a borrower’s vehicle. It may also feature a total annual percentage rate that exceeds 36 percent when the fees are included.
The CFPB’s proposals for short-term and long-term loans are similar. For instance, with long-term loans the agency is also suggesting that lenders complete an income verification assessment, consider a borrower’s other debts and review a borrower’s credit history.
To protect borrowers, the CFPB may require lenders to assess a borrower’s eligibility each time he or she applies for a loan or attempts to refinance one. Under this proposal, a lender would not be permitted to shift a borrower into a new loan if that person had missed a payment.
Interest rate and fee caps are other suggestions that the CFPB is considering as is a payment amount limit. For instance, a payment could not be more than 5 percent of a borrower’s monthly income. The CFPB may also enact a regulation that limits the number of long-term loans that a borrower could take out to two a year.
Limits on Collections
The agency’s proposals regarding collections include requiring lenders to provide a three-day notice before they begin collection practices that involve withdrawing funds from a borrower’s deposit account. Lenders would also face a withdrawal attempt limit. This proposal protects consumers by decreasing fees.
Fundamental Changes in the payday loan Industry
Industry experts expect the CFPB to enact its new laws for short-term and long-term loans along with the industry’s collection practices sometime this year. When it does, the agency is likely to change the way that lenders complete business at a fundamental level.