Proposed Regulations of Payday Loans May Protect Consumers from Predatory Lenders
The Consumer Financial Protection Bureau, the Federal agency tasked with shaping laws on consumer lending, privacy, and banking issues, recently released details on a proposed set of legislation that would protect individuals from being trapped in vicious payday lending debt loops. The $46 billion payday loan market caters most often to lower-income individuals without other options to obtain credit, and studies estimate that 70% of the loans are used to meet day-to-day expenses.
The CFPB’s proposed regulations would mandate that lenders first verify an individual’s ability to repay a loan, or to offer more affordable repayment options. Under one option in the proposed regulations, lenders offering loans due within 45 days would not be able to roll a loan over more than two times within a 12-month period without first offering the consumer an affordable payment plan to get out of the debt. Additionally, the loan could not be for over $500.
For longer-term loans, such as car title loans and some other installment loans which extend longer than 45 days, different rules would apply. Lenders would be required to analyze the potential borrower’s other financial obligations and lending history in order to determine that the borrower will be capable of paying back the loan when it becomes due. Offering some longer-term loans would also require that the lenders cap interest rates at 28%, or that they limit the size of monthly installment payments to 5% of the borrower’s gross income. Currently, borrowers are vulnerable to the imposition of unaffordable “balloon payments” and triple-digit interest rates, forcing them to take out additional short-term loans to be able to afford the loan payments plus everyday expenses. Some consumer advocacy groups are concerned that lenders will reclassify the types of loans on offer to avoid less-desirable limitations imposed by the rules, but the groups are in agreement that payday lending is in sore need of government regulation.
Currently, there is no requirement that loan payments are “affordable.” While what is affordable to one individual may not be to another, studies have shown that most payday loan borrowers cannot afford to pay more than 5% of their monthly income toward a loan. Despite this, payday lenders on average currently garnish one third of a borrower’s paycheck toward loan repayment. While most borrowers intend such loans as a short-term fix when they can’t afford their expenses, the average individual who takes out a payday loan ends up in debt for six months. Borrowers end up paying an average amount of $520 in fees to repeatedly borrow $375 in credit.
Payday loans have been cited as a leading cause of bankruptcy behind medical and credit card debt, and can create a dangerous vicious cycle for unwary borrowers. If you’ve found yourself trapped in a cycle of short-term or payday loan debt, seek help in escaping these predatory lenders. Contact Lanna Kilgore PLLC to find out ways that a consumer law and bankruptcy attorney may be able to help.