CFPB lifts restrictions on payday lenders
Payday lenders don’t need to verify that individuals taking out short-term, high-yielding loans are likely to be able to repay them, according to the Consumer Financial Protection Bureau Financial said this week.
The new rule removes a rule made under the Obama administration that would have required lenders to look at someone’s income other monthly payments – like rent, child support, or student debt – before you give them a loan. It should protect borrowers from getting into a debt cycle. The payday lending industry has cracked down on these regulations, and they never came into effect under the Trump administration. Now the CFPB has officially withdrawn it.
over 12 million Americans Take out payday loans every year, mostly to cover needs such as rent or utilities. Coloured people, Single parents and low-income people are most likely to rely on these types of loans, which can come with interest rates in excess of 400%.
“Any kind of relaxation of regulation during this pandemic, especially related to this COVID-19 crisis, is just really hard to swallow knowing that people are struggling financially,” said Charla Rios, researcher at the Center for Responsible lending. “It feels like this rule has opened the door for a lot of consumers to make things worse.”
More than 80% of the people who take out a payday loan cannot repay it within two weeks and end up having to take out another loan the CFPB’s own research.
Former CFPB director Richard Cordray, who led the push to regulate payday loans, said in 2017 that the goal was to “stop the payday debt traps that plagued communities across the country.”
But the current director of the CFPB, Kathleen Kraninger, said the regulations will be withdrawn would “ensure that consumers have access to credit from a competitive market”.
Something similar said the payday lending industry group, Community Financial Services Association of America, which opposed the 2017 rule, in a written statement: “The CFPB’s decision to enact a revised definitive rule will benefit millions of American consumers. The CFPB’s actions will ensure that critical loans continue to flow to communities and consumers across the country. “
Some short-term loans “can work for a consumer, if created with the ability to repay, their financial prospects will not be deteriorated,” said Rob Levy of the Financial Health Network.
Requiring lenders to determine whether a borrower is likely to have the means to repay the loan when due, he said, “is a pretty bare minimum to ensure that the product does not simply make someone worse off than before. ”
Now it is up to each state to decide whether and how payday lenders are regulated. Thirty-two states currently allow payday loans. The other 18 states and the District of Columbia either prohibit them entirely or have interest rate caps.
“The situation you want to avoid is people falling over their heads and entering this cycle of taking out a loan, not paying it back, paying the second loan fee again, and over and over again until they get a lot more pay back when they borrowed, ”said Lisa Servon, professor at the University of Pennsylvania and author of The Unbanking of America.
The rule, which the CFPB withdrew this week, “would have helped prevent this from happening to more people”.