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CFPB Proposes Rule Requiring Payday Lenders To Assess Borrowers' Creditworthiness

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).