The Consumer Financial Protection Bureau will release a new set of rules on Thursday that is believed to affect millions of low-income borrowers who seek to get a payday or a high-cost personal loan. The federal regulator’s new pack of measures is aimed at limiting the growing number of Americans who get stuck with debt loads and fees they are unable to pay back.
Many borrowers become buried in the loans’ steadily increasing fees, eventually leading to the loss of their bank account or other property – like their cars, for instance. Some could even spend time in jail for not being able to repay a loan deal that was unfair in the first place, as the CFPB intervention suggests.
Until Thursday CFPB meeting in Richmond, Virginia, payday loans used to be regulated at a state level only. The new rules aim to ensure that before any loan is approved the lender must have some sort of guarantee that borrowers will be able to repay their debt, or else offer them affordable repayment options.
Until now, borrowers who couldn’t afford to pay back usually resorted to rolling over their debt and renewing their loan. According to the CFPB, 80 percent of the high-cost loans ended up being renewed in the first two weeks, leading to a spiral of debt the borrower usually couldn’t escape without losing property. As of Thursday, the new regulations seek to drastically reduce the number of roll overs debtors can take.
Examples such as the one described above have come to be largely considered “debt traps” by consumer rights activists, and the federal regulator now seems to agree. “Extending credit to people in a way that sets them up to fail and ensnares considerable numbers of them in extended debt traps, is simply not responsible lending,” CFPB director Richard Cordray told in a press release before the Richmond reunion.
How exactly will this end debt traps?
What the new pack of rules does is target directly the short-loans that were traditionally designed for low-income borrowers. The loans practically consist of a few hundred dollars that can even be sent online to the borrower, amount they agree to pay back until their next paycheck. Usually that doesn’t happen, so borrowers have to take another loan to cover their debt, and so on. The interest keeps growing, until the amount borrowers have to repay each mounts becomes no longer affordable. In case property was used as collateral – such as cars, in vehicle title loans – borrowers are forced by the agreement they signed to cede that property to the lender.
The reason why these types of loan are considered debt traps is because normally they target only low-income borrowers or known debtors who wouldn’t have a bank loan approved and have no one else to turn to.
Under the new regulations, lenders will have to check first a borrower’s history and financial obligations before approving the loan. They will have to be sure that consumers can afford to repay the entire debt on time before going for a roll over loan.
Short-term loans have been capped at $500 and can no longer require a car as collateral. The restrictions also impose a 60 day interval between giving two loans to the same consumer and according to the CFPB “affordable repayment options” need to be provided first by the lender.
While most consumer advocates regard the new pack of rules as a step in the right direction, there are some who think it is too much of a careful approach that won’t really make a difference. Lauren Saunders, with the National Consumer Law Center, thinks that “The CFPB has taken an either/or approach: prevention or protection. But borrowers need both.”
But the regulators also had to consider how limiting the number of loans available to low-income Americans would affect them on a daily basis. Payday loan industry leaders argue that a more extensive data had to be collected before coming to this decision. They do agree though that borrowers need to offer more guarantees they will be able to pay back right on schedule.
The CFPB board will review the proposed regulations on Thursday and if an agreement is reached they will come into effect probably in a few months. Until then, President Obama is expected to give a speech in Birmingham, Alabama, where he’ll try to convince Republicans to agree with the payday industry regulations.
Image Source: The Australian
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