New payday loan rules could put millions in debt trap

The Consumer Financial Protection Bureau Tuesday issued a final rule on payday loans, repealing Obama-era provisions that would have required lenders to ensure borrowers could repay their loans before issuing cash advances.

To help ensure that borrowers do not fall into so-called debt traps, the CFPB released new multi-part payday loan regulations in 2017 which, among other things, required payday lenders to verify that borrowers could afford to repay their loan on time by verifying information such as income, rent, and even student loan repayments.

But the Trump administration has blocked those rules from taking effect and called for a review. On Tuesday, the CFPB – under new leadership – issued a finalized rule that does not require lenders to verify that borrowers can afford to pay.

This “ensures that consumers have access to credit and competition in states that have decided to allow their residents to use these products, subject to state law limitations,” the agency said in a statement. Additionally, CFPB staff found that there was “insufficient legal and evidentiary basis” for requiring lenders to verify consumers’ ability to repay their loans.

The CFPB has kept restrictions in place that prevent payday lenders from repeatedly trying to withdraw payments directly from a person’s bank account. Some payday lenders attempt to recover their money by withdrawing what is owed to them directly from borrowers’ checking accounts, to which borrowers grant access as a condition of the loan. But unexpected withdrawals from the lender can result in costly overdraft fees and damage to credit scores.

Consumer advocates say the CFPB’s case for overturning the 2017 rule doesn’t hold up to scrutiny and condemned the agency’s decision to scrap underwriting mandates. “By eliminating repayment capacity protections, the CFPB is making a serious mistake that leaves the 12 million Americans who use payday loans each year exposed to unaffordable payments at annual interest rates averaging nearly $400. %”, declares Alex HorowitzSenior Research Officer for the Pew Charitable Trusts Consumer Credit Project.

“Last October, we learned that in return for Trump campaign contributions, payday lenders were bragging they could ‘pick up the phone and…get the President’s attention’ to push back on regulation,” Sen. Sherrod Brown (D-Ohio) said in a statement on Tuesday. in cycles of indebtedness.”

Why payday loans can be problematic

Tuesday’s final rule by the CFPB comes at a time when Americans are increasingly looking for credit. One in three Americans has lost income due to the coronavirus pandemic, according to the Financial Health Network. The pulse of financial health in the United States in 2020a survey of more than 2,000 American adults between April 20 and May 7, 2020.

Among Americans who report losing income, 3% of survey respondents say they have had to borrow money using a payday loan, deposit advance or pawnbroker.

Payday loans can be easy to get, but hard to repay. In the 32 states that allow payday loans, borrowers can usually take out one of these loans by going to a lender and simply providing valid ID, proof of income, and a bank account. Unlike a mortgage or car loan, no physical collateral is usually required.

Most lenders who offer payday loans require borrowers to pay a “finance charge” (service charge and interest) to obtain the loan, with the balance due two weeks later, usually on the day of your next payday. . Nationally, the average APR for a payday loan is around 400%. It is relative to personal loan rates ranging from 10% to 28% on average, depending on your credit. Or credit cards, which charged an average interest rate of around 15% interest in February, according to the St. Louis Federal Reserve.

Lenders say the high rates are necessary because payday loans are risky to finance. And opponents of the Obama-era payday loan rule argue that the ability-to-pay provisions were too burdensome and costly. “The repayment capacity provisions were simply unworkable and imposed burdens on consumers and lenders in the form of unreasonable levels of documentation that were not even required of mortgage lenders,” D. Lynn DeVault, president, said Tuesday. of the Community Financial Services Association of America. . The complex and costly regulations “would have effectively put lenders out of business rather than protecting consumers”, she added.

However, borrowers often cannot repay these high-cost loans immediately, so they are drawn into a cycle of borrowing and accumulating financial burdens. The research carried out by the The Consumer Financial Protection Bureau under the Obama administration found that nearly one in four payday loans are re-borrowed nine or more times. Additionally, it takes borrowers about five months to repay the loans and costs them an average of $520 in finance charges, Pew reports. This is in addition to the original loan amount.

The personal loan landscape

The Obama-era rules were already starting to work, says Horowitz: “Lenders were starting to make changes even before [the 2017 rules] officially took effect, safer credit was already starting to flow and harmful practices were beginning to fade. Today’s action puts all of that at risk.”

Currently, 12 states — Arizona, Arkansas, Georgia, Maryland, Massachusetts, New Jersey, New York, North Carolina, New Mexico, Pennsylvania, Vermont, and West Virginia — ban these types of loans entirely. Of those that allow payday loans, 16 states and the District of Columbia have put in place provisions capping interest rates at 36%, while other states have imposed other lending restrictions on payday loans. salary. Currently, 32 states allow small dollar loans without major restrictions, according to the CFPB.

More and more states are trying to add restrictions. Last month, The Nebraskans for Responsible Lending Coalition said they had collected enough signed petitions to secure an initiative that would cap the annual interest rate on payday loans at 36% in the state’s November ballot.

In November, federal lawmakers introduced legislation by the Fair Credit Act for Veterans and Consumers this would cap interest rates at 36% for all consumers nationwide. The bipartisan legislation – which is the latest attempt to limit payday loans at the federal level – was built from the framework of the Military Loans Act 2006, which capped loans at 36% for active-duty military members. But despite Democratic and Republican co-sponsors, the bill remains stalled.

“With the CFPB abandoning its role of protecting families, Congress must act now to extend a nationwide 36% rate cap to all families — which is widely supported by Americans across the ideological spectrum,” says Lauren Saunders, director Associate of the National Consumer Law Center.

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