Opinion | The little boys win you over on the payday loan
Since the Federal Consumer Financial Protection Bureau opened in 2011, the agency’s investigation and enforcement efforts have repaid more than $ 12 billion to car buyers, homeowners, credit card holders, and other borrowers victimized by fraudulent or predatory practices. Consumers who have gotten into debt from the infamous payday loan industry are now getting extra help from the office with a rule imposed this month.
These lenders advertise as “easy” the short term loans that are due in two weeks. The borrower typically issues a postdated check for the full balance – including fees – or allows the lender to electronically withdraw funds from their checking account. Borrowers often take out another loan to pay off the first and get caught in a cycle of increasing debt.
The office took place in a Study 2014 Of around 12 million payday loans that only 15 percent of borrowers could repay the total debt within two weeks without having to borrow again. Almost two-thirds of borrowers renewed their loans – some more than ten times – and paid heavy fees that further deteriorated their financial standing. Strikingly, the bureau found that most people pay more fees than they originally borrowed.
The new rule limits how often and how much customers can borrow. And lenders need to take the sensible approach to underwriting and determine if the borrower can pay the entire loan and still cover the cost of living.
Borrowers can take out a short-term loan of up to $ 500 without this test, provided that it is structured so that they do not automatically get back into borrowing. The rule also limits the number of times the lender can charge the borrower’s account so that borrowers can contest erroneous withdrawals.
The office is prohibited by law from setting interest rates. But the new regulation makes it clear that state usury laws – already on the books in 15 states – are the most effective way to end debt trap exploitation. The only weakness of the new regulation is that it is immensely complicated, which means that industry inevitably finds loopholes that it can exploit.
The payday industry is screaming as expected, arguing that the new restrictions will dry up credit in some areas. The truth is, payday loans go on with lower profit margins – without the debt trap. In addition, small banks and credit unions are beginning to realize that they can make money in the small loan business without any predatory tactics.
Industry leaders in the payday industry are calling on Congress to rule by the Congressional Review Actwith which the legislature can repeal regulations within 60 legislative days. But at-risk lawmakers will be reluctant to vote for predatory lending tactics that drive people into poverty.
The Trump administration could undermine the rules after the director of the office, Richard Cordray, resigns or when his term ends next summer. Consumer advocates must remain vigilant about this possibility.