Nobody likes payday loan shops, unless they are the one who owns it and gets rich off the people they prey upon. Many years ago when people borrowed money from the mob, they got hurt if they didn’t pay. Today, some folks under water with payday loan shops might prefer physical injury over the incredible fees and charges they pay for the convenience of a short-term loan. The Consumer Financial Protection Bureau (CFPB) focuses its latest in a series of efforts to give relief to consumers who suffer from the after effects of payday loans. The proposed rulemaking follows a 2014 CFPB study of payday lending practices which highlighted the frequency in which borrowers we able to extend their repayments, repeatedly, and owed more money in fees than the principal amount they originally borrowed. Meanwhile, payday loan industry representatives speak out against the CFPB and its proposed new rules.
Is there a significant trap in the payday loan process? The CFPB reports suggests so.
The 2014 payday study, CFPB Data Point: Payday Lending, conducted by the CFPB Office of Research, notes that more than half of payday loans are due within two weeks of the issuing date, with an annual interest rate of approximately 390 percent; most of the consumers repeatedly extend their repayments, incurring more debt and owing more fees than they borrowed. In 80 percent of the auto title loans, where borrowers secure the loans by putting their vehicles on line, the borrowers have to extend the loans because they cannot afford to pay them. Half of all the loans are renewed and the borrowers are in loans more than “ten loans long.” Key findings of the report also state that the majority of monthly payday loan borrowers are government benefit recipients.
The people who can least afford high interests rates are already facing financial difficulties that lead them to payday loans. These borrowers may not have the credit rating or access to affordable loans that others may enjoy.
The CFPB assesses data regarding payday loans to better highlight the realities of higher risk lending. The opening language of the study states that the CFPB is focused on “providing an evidence-based perspective on consumer financial markets, consumer behavior, and regulations to inform the public discourse.”
The CFPB proposed rules set forth objectives in counteracting predatory payday lending practices.
There are two main loan categories considered in the proposed rules, loans shorter than 45 days and loans longer than 45 days, that have more than a 39 percent all-in annual percentage rate, and are either secured by the borrower’s vehicle or the payments are automatically deducted from their account or income. For both these loan categories, the new rules would require the lender to independently determine whether the borrower can afford to repay the loan.
Abusive and unfair short term and payday loan practices would also be identified under the proposed new rules. In addition to identifying bad practices, the rules would restrict lenders from loaning money to borrowers who already have outstanding loans. Additional restrictions would prevent lenders from making multiple payment attempts, trying to draw the payment from the borrower’s account, after two consecutive payments that declined when processed, and this saves already unable-to-pay borrowers from additional fees and charges from the payday lender.
Lenders say the rules would cripple their industry and block the access to money that borrowers need, often in emergencies.
The negative economic impact of the proposed new rules on payday lenders could be significant. Recent news articles noted, ““Thousands of lenders, especially small businesses, will be forced to shutter their doors, lay off employees, and leave communities that already have too few options for financial services,” said Dennis Shaul, the chief executive of the Community Financial Services Association of America, a trade group for payday lenders. According to the group’s website, “More than 19 million American households count a payday loan among their choice of short-term credit products.”[i]”
With an average fee of $15 on every $100 borrowed, payday lenders have significant fees at stake and as lender experts suggest, the new CFPB rules run some payday lenders out of business. Those with financial interests in the outcome of the proposed new rules may be keeping a close eye on the presidential election, as the Democratic presidential candidates generally support stricter consumer finance rules and restrictions.
The Zamparo Law Group follows several rulemaking propositions and developments with the CFPB and will frequently share news that affects consumers, in particular, the development of rules for better practices in the short term and payday lending industry.
The Zamparo Law Group, P.C. is a consumer protection law and litigation firm, representing consumer plaintiffs. Zamparo Law Group in the northwest suburbs of Chicago sues and wins against the companies who refuse to follow the law.
To learn more about consumer protection law and the Zamparo Law Group, please visit the firm’s website. You may also ask for a free case review. The Zamparo Law Group is connected on social media, please follow us and share our resources we share on our Facebook, Twitter and LinkedIn pages. You may call the Zamparo Law Group with any questions by dialing (224) 875-3202.
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