Cracking Down on Payday Loan Sharks

The Consumer Protection Bureau recently disclosed that they are in the process of proposing new rules that will protect borrowers from predatory lending practices of payday loans.

I am glad to hear this. I see too many people with ridiculous payday loans where the APR is over 100% (sometimes up to 300%)! With such high interests, a borrower is essentially set up to fail. I’ve always just thought of payday loans as just legal loan sharks, I’m glad to see more regulation.

Just in case you weren’t sure what a payday loan is, it’s basically a short term loan where you agree to pay it back within a month or even on your next pay check. If a consumer fails to pay the loan back within the time frame, they face an APR often over 100%. The high interest rates compounds quickly driving people to think the solution is another payday loan. Unfortunately because of the desperation in people seeking payday loans, they often fail to realize just what they are getting into.

The Changes/Proposals

  1. Full Payment Tests – This will require lenders to determine that a borrower will be able to repay without additional borrowing. I have seen debtors in this scenario, with not one but two or three ridiculous payday loans.
  2. Short Term Principal Payoff – Consumers can borrow a short term $500 loan with the full payment test. Lenders however will be barred from allowing a consumer to borrow this loan if they already have an existing payday loan. Additionally, they are barred from taking an auto title as collateral. Lastly, consumers will be allowed at least two extensions to pay off the loan so long as they pay back at least 1/3 of the loan.
  3. Less Risky Long Term Loans – This proposal allows lenders to offer two longer-term loans. First option are loans adhering to National Credit Union Administration “payday alternative loans” where interest rather are capped at 28% and $20 application fee. Second option is offering loans that are payable in equal payments not to exceed two years and with all-in cost of 36% or less but not including a reasonable origination fee. A lender can only give these loans so long as their existing loans have a less than 5% default rate. If their default rate exceeds 5% in any given year, than origination fees must be refunded. The numbers of both these types of loans are limited.
  4. Debit attempt cutoff – Lenders must give consumer written notice before debiting a missed payment directly from the account. After two unsuccessful attempts to debit the consumer’s account, the lender has to stop until it gets authorization from the consumer.

These are still proposals as they are going to allow public comment, but I’m glad to see a great first step to more protection for consumers. If you find yourself in a situation where you have one or more payday loans that you cannot pay, please contact my office for a consult before you take out another loan.

All information contained in this blog where taken from the Consumer Financial Protection Bureau. I would encourage you go to their website for more in-depth information. None of the opinions set forth shall be considered legal advice or forming an attorney/client relationship.

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