The proposed regulations were presented by the Consumer Financial Protection Bureau on Thursday morning. The clampdown seeks to address two of the most common complaints surrounding the payday loan industry.
A 2015 study found that payday borrowers are often charged an average of $185 in overdraft fees and bank penalties caused by payday loans. In addition to the overdraft fees, one in five borrowers of auto title loans have their cars seized as a result of being unable to repay a loan.
To fix these issues, Consumer Financial Protection Bureau officials have proposed that the lenders should be required to conduct a “full-payment test.” If the lender conducts this test, it should be able to determine whether the borrower will be able to pay the loan when it is due. Payday loans are generally borrowed in one lump sum and paid in one lump sum two weeks later (a pay period away from when it was borrowed).
In addition to the “full-payment test,” Consumer Financial Protection Bureau officials have also proposed that lenders provide warnings before they attempt to collect on a loan. Usually payday loan companies access payment through a debit on the borrower’s account. With this part of the regulations proposed, CFPB officials hope to lower the amount of overdraft fees that are often common among those who take out payday loans.
Payday lenders would also be required to give borrowers a three-day notice before withdrawing payment from their account. If the company attempts to collect on the loan twice and is unable to receive payment from the account, the lender will then have to receive written authorization to withdraw the funds from the account.
CFPB officials are also proposing that auto titles no longer be used for collateral on payday loans. This would end the auto-title lending industry, however, it would prevent many people from losing their vehicles due to a payday loan.
CFPB Board Director Richard Cordray said, “Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt.” With the proposed regulation, lenders would be required to really assess whether the borrower will truly be able to pay the amount in full when it is due as well as provide a warning for the collection.
Currently, the proposal made by the Consumer Financial Protection Bureau has received mixed reactions from consumer advocates. This is because the proposal does not address the high interest rates associated with these types of loans. The average annual percentage rate for a payday loan is about 390 percent or higher. Auto-title loans sit at about 300 percent. The idea is that these types of loans will fix short-term money trouble but for many it has led to a long-term debt issue and, in some cases, has led to the repossession of property.
The proposed regulations will be available for review for a few months before being passed. The CFPB is seeking comments from the general public and any other interested parties until September 14.
Do you have a payday loan you’d like to voice your opinion on? Start a conversation in the comments.
Photo: Flickr: Anthony Easton