The Consumer Financial Protection Bureau has proposed a set of new rules aimed at protecting consumers from the cycle of long-term debt that often comes with payday loans. Anyone who has ever needed a payday advance knows that these short-term loans, which have a staggering average interest rate of 390% (reaching up to 1000%), can lead to lasting consequences. In fact, every year in the United States, payday loan borrowers spend roughly $7 billion in interest and fees alone, and spend six months or more in debt per year on average. It is widely recognized that payday lending practices as they currently are have created a “debt trap” cycle that sets up borrowers to fail before they even receive the loan.
Knowing this, the CFPB has proposed the following changes to restrict predatory lending practices:
- Regulation of penalty fees. When a borrower takes out a payday advance, they may have to give their lender access to their checking account. On payday, the lender has the authority to automatically debit the repayment amount from the account. If, however, the borrower’s account does not contain sufficient funds, it could end up costing them expensive overdraft fees. The CFPB proposes that lenders be required to provide the borrower with written notice at least three days before attempting to collect payment from a bank account, including information on how much will be debited and the date of the upcoming transaction.
- “Full payment” tests. Prior to being able to extend a loan, a lender would be required to verify that the borrower will have the means to repay the debt without needing a renewal and still have enough to cover basic living expenses like rent, utilities, food, etc. This proposal is intended to cut down on the number of people who get stuck with loans that they might not be able to repay. Furthermore, if the lender attempts to collect repayment twice without success, they will have to obtain written authorization from the borrower before they can make another attempt.
- End the “debt trap” cycle. More than 80% of payday loans are re-borrowed within a month. The goal of the CFPB is to make it more difficult for lenders to re-issue or refinance a loan, which keeps borrowers in the debt trap cycle longer.
- End use of auto titles as collateral. The CFPB is also proposing that auto titles no longer be used as collateral to obtain a loan. A study has found that one out of five borrowers using auto title loans as collateral were having their cars seized for failure to repay their loan. This leads to the secondary consequence of taking away the borrower’s means of getting to his or her job, driving them deeper into debt.
The CFPB is seeking comments from the general public on these proposals before any final regulations are issued.
If you are struggling to pay off a high-interest loan, credit card debt, or any other type of consumer debt, we invite you to get in touch with a Chicago consumer lawyer at Atlas Consumer Law We would be happy to review your financial situation and talk about which debt relief options may benefit you. To schedule an appointment, please call (312) 313-1613 today.