New Payday Ruling to Stop Predatory Loans
October 12, 2017
By Mario A. Cortez
This week, the The Consumer Financial Protection Bureau (CFPB) set forth a new ruling, which aims to prevent predatory payday loans from ensnaring people unable to repay their loans.
Lenders must now determine upfront if customers are able to repay their loans since people trapped in loans often times have expensive penalties for refinancing debt and other fees on top of high interest.
Payday loans are heavily marketed to people who are financially unstable and often cannot afford to pay back the full balance when it is due. This scenario leads borrowers to defaulting or borrowing once more in order to not default.
According to a press release from the CFPB, about 1 in 4 payday loans are re-borrowed at least nine times. The high number of loan agreements often times leads borrowers paying a higher amount in fees than credit received.
“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” said CFPB Director Richard Cordray through a press release. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”
Under the new guidelines, lenders must conduct what has been named the full-payment test, which determines if a borrower can afford to repay their loan without taking out another loan.
The new rule also includes a debit attempt cutoff for any short-term loan, balloon-payment loan, or longer-term loan with an annual percentage rate higher than 36 percent that includes authorization for the lender to access the borrower’s checking or prepaid account.
According to the press release, lenders can still skip the full-payment test by way of a “principal-payoff option” offer, which allows borrowers to pay off the debt in a more gradual manner.
The new rule also still allows less risky loan options, including certain loans typically offered by community banks and credit unions, to skip the full-payment test.
Over the course of five years, the CFPB took into account research, outreach, and over 1 million pieces of feedback from people ranging from policy makers to low-income borrowers in an effort to develop a new way of stopping predatory lending practices.
While the rule addresses problems caused by payday lenders, all lenders who regularly extend credit are subject to the CFPB’s requirements for any loan they make that is covered by the rule. Banks, credit unions, and non bank lenders are subject to this rule regardless of whether they operate online or out of storefronts.