The Consumer Financial Protection Bureau is back in the news after its proposal on Thursday to impose new regulations on the payday loan industry. The agency’s new rule is aimed at keeping consumers from falling into debt traps with payday lenders and other providers of high interest loans. For example, a Kansas City retired marine, Elliott Clark, took out five $500 loans, and each one cost him more than $50,000 in interest.
The proposed rule has two key provisions aimed at keeping borrowers from digging themselves into a debt hole they can’t get out of. The first provision would be a full payment test. "[L]enders would be required to determine whether the borrower can afford the full amount of each payment when it’s due and still meet basic living expenses and major financial obligations." Short term loans are typically for a two-week period. When a borrower can’t pay up at the end of the initial loan period, the loan is rolled over and interest begins to pile up. CFPB Director Richard Corday explained that “It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”
Another key provision of the new regulation would help protect borrowers’ checking accounts. The new rule would require a lender to give a consumer written notice before attempting to debit the consumer’s bank account to collect a loan payment. "After two straight unsuccessful attempts, the lender would be prohibited from debiting the account again unless the lender gets a new and specific authorization from the borrower." This should lower the insufficient fund fees that payday loan borrowers encounter when they find that their bank accounts have been debited.
The proposed rule would also prevent payday lenders from taking a borrower’s auto title as collateral for the loan. This would effectively end the auto title loan industry. A CFPB study released in May found that one out of five borrowers who took out a car title loan wound up having their cars seized by the lender. Payday loan rates involving car titles are about 300%; regular payday loans carry interest rates averaging 390%, but rates sometimes go as high as 1,000%.
Payday lenders have opposed such a rule as the one proposed by the CFPB, asserting that it would force them out of business and leave many borrowers with no source of credit. Others, such as the Pew Charitable Trust, argue that the new proposed rule doesn’t do enough to protect consumers from harmful lending. In a political year, Democrats have supported limits on payday lending. Hillary Clinton has come out in support of payday lender regulation, while Donald Trump is opposed to the financial reforms of the Obama administration and has said that he would dismantle nearly all of them.
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