The Consumer Financial Protection Bureau (CFPB), a government agency created
after the 2008 financial crisis to protect consumers, recently proposed
a new rule that would help protect consumers from falling victim to payday
loan debt traps.
To help consumers, the rule requires that payday lenders take steps to
verify that the consumer can repay the loan. Additionally, the rule prevents
lenders from making multiple or repeated debit attempts that rack up overdraft
fees. The rule would apply to payday loans, car loans, deposit advances,
and other types of high-cost or open-end loans.
These types of loans are often used by people who are struggling financially.
While a payday loan may help a consumer pay off an emergency expense like
a car repair, consumer can end up stuck in a cycle of taking out payday
loans in order to pay off the previous paycheck’s payday loan. The
interest and fees associated with these products can make it difficult
for the borrowers to ever come out ahead.
Payday loans are usually due within two weeks, generally shortly after
the borrower gets paid. The loans may have an exorbitant interest rate,
with APRs usually around 300%-400%. In creating the proposed new rules,
the CFPB also targeted high-cost installment loans, which are generally
the types of loans offered over the internet or on late-night television.
These loans usually require the borrower to make very high payments that
go mainly towards the interest on the loans.
To fix this problem, the CFPB is proposing that lenders apply a “full
payment” test. The lender would need to determine whether the borrower
would be able to make the full payment each month while still meeting
basic living expenses and other major financial obligations.
Consumers could borrower up to $500 without the full payment test. But,
lenders could not offer this option to borrowers with outstanding short-term
loans or to borrowers who have been in debt on these loans for more than
three out of the past twelve months.
Lenders could also offer two types of longer-term loans, but with more
restrictions and less risk than their current products. For instance,
the first option would allow lenders to offer payday alternative loans
that meet the standards of the National Credit Union Administration. These
loans would be capped at a 28% interest rate, and the application fee
would need to be $20 or less. Alternatively, he lender could offer loans
with a term of two years or less so long as the total costs is less than
36%. To offer these types of loans, the lender would have to make sure
that the overall projected default rate is less than 5%.
Finally, the CFPB wants to help consumers who are plagued by overdraft
fees. The new proposal would require lenders to notify the borrowers about
when payments will be debited from the borrowers’ accounts, and
would only allow the lender to attempt to debit the account twice. Any
further attempts mare only authorized if the borrower provides the lender
with a new authorization specific to that payment. The CFPB hopes that
this will keep borrowers from incurring NSF fees of $30-$40 each after
repeated debit attempts.
Hopefully these proposed regulations will help consumers stay out of debt
traps that they cannot afford. For those who are still stuck paying debt
that they cannot afford, Loan Lawyers may be able to help. To schedule
a free consultation about your debt solution options, contact our South
Florida debt defense attorneys today by calling (888) FIGHT-13 (344-4813).