Federal regulators on Thursday released new rules that will drastically restrict access to payday loans and curb some practices that have angered consumer advocates.
Payday loans, which provide cash-strapped consumers with quick access to cash, are typically characterized by ultra-high interest rates and short repayment periods. Borrowers often cannot afford to repay them, so they end up taking out new loans and get stuck in a cycle of debt.
Under the new rules, the Office of Consumer Financial Protection will require payday lenders to determine a borrower’s ability to repay the loan while still face basic living expenses and major financial obligations. A consumer will also not be able to take out more than three loans in quick succession.
The rules will also restrict the means by which a lender can pursue repayment. For example, lenders will be prohibited from making more than two failed payment attempts without obtaining additional consent. Repeated payment attempts can incur charges and potentially result in the loss of their bank account by the consumer.
“The CFPB rule limits the ability of payday lenders to put families in a vicious cycle of debt by adopting the common sense requirement that lenders consider a borrower’s repayment capacity and limiting the number unaffordable back-to-back loans, ”said Lauren Saunders. , associate director of the National Consumer Law Center.
The rules have been in the works for several years and have encountered strong opposition from lenders who argue that people rely on payday loans for emergencies and have few other options available. A consumer has traditionally been able to take out a payday loan without going through a credit check or posting collateral.
“This new rule will create ‘credit deserts’ for many Americans who do not have access to traditional banking services,” said Edward D’Alessio, executive director of the Financial Service Centers of America, a commercial group. He added that hundreds of stores will be forced to close.
Lenders will still be able to provide loans up to $ 500 regardless of the borrower’s repayment capacity, but the loan should be structured so that the borrower has a longer repayment period. The rule also allows credit unions and local banks to continue to make small personal loans.
“The new CFPB rule ends the payday debt traps plaguing communities across the country,” CFPB director Richard Cordray said in a statement. “Too often, borrowers who need cash quickly find themselves trapped in loans they cannot afford.”
Since the consumer watchdog does not have the power to set ceilings on interest rates – that is left to the states – it has focused on restricting access to short-term loans. and on the implementation of other safeguards.
Interest rates on a payday loan taken out online or in one of the 16,000 storefronts are often above 300%. SA person who takes out a payday loan can expect to pay a median fee of $ 15 for every $ 100 borrowed, according to the CFPB. Four out of five payday loans are rolled over or renewed within two weeks.
The final rules, which also govern auto title loans, deposit advance products and longer term loans with lump sum payments, will come into effect in mid-2019. The CFPB began overseeing the $ 38.5 billion payday lending industry in 2012 and last year released a proposed set of rules that drew more than a million comments.