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Nearly three dozen Senate Democrats are pushing the Consumer Financial Protection Bureau to adopt "the strongest possible" payday lending rules, including a requirement that lenders assess consumers' ability to repay the loan.
June 4 -
After releasing successive studies on the payday industry over the past two years, the Consumer Financial Protection Bureau is finally set to unveil Thursday sweeping proposals that could fundamentally change the business of short-term loans and other products
March 26 -
The Consumer Financial Protection Bureau's plans for revamping payday lending set off a fierce debate Thursday over whether the agency had gone too far or not far enough, proving that this is likely to be one the trickiest rulemakings the agency will ever attempt.
March 26 -
While the CFPB's proposed rules may force payday lenders to adjust their business models, well-meaning ones should be able to operate in this new framework.
April 9
The Consumer Financial Protection Bureau took an
There's no denying the strong demand for payday loans in the American economy. More than half the nation's consumers (56%) have
Many of the people most vulnerable to payday and other predatory loans are low-income families, households of color and seniors on fixed incomes people who already occupy a fragile position in the American economy. Payday lenders know the statistics favor their industry, which is why they aggressively market their product to those without access to affordable credit.
For households struggling to meet basic needs, a payday loan can seem like an attractive way to stay afloat until the next pay check. Unfortunately,
What's more, Pew found that just 14% of payday borrowers were able to pay off the full loan within the standard two-week period. The CFPB's own
The CFPB's proposed framework would do much to rein in the industry's most abusive practices. It would prevent lenders rolling over the same loan multiple times, a practice all too common in an industry where interest rates average just under 400% APR. The framework also prevents mandatory check-holding, a practice in which lenders require the borrower to provide a post-dated check or written permission to automatically withdraw money from their bank account regardless of whether they have the funds to cover it.
These reforms need to be implemented as soon as possible. With each day that passes, more and more low-income consumers will be stripped of their hard-earned cash and trapped in a cycle of debt and poverty. Consumers cannot continue waiting around for rules that would protect them from these predators, who meanwhile reap
Federal regulations would also help level the playing field for consumers who live in states with few, if any, controls over payday lending. Missouri, for example, allows lenders to charge interest rates of more than 1,900%. The
But before the CFPB issues new regulations, it should incorporate a few additional changes. For one thing, it should explicitly address the problem of unscrupulous online lenders who violate state consumer protection laws by strengthening states' capacity to protect their citizens from predatory loans made online.
The CFPB also should go further to ensure that payday lenders determine a borrower's ability to repay loans. In the current proposal, the CFPB outlines two methods to protect short-term loan borrowers from falling into a cycle of long-term debt, allowing lenders to choose the method they prefer.
Unfortunately, only one of these methods requires lenders to underwrite for the ability to repay. The other allows lenders to skip the underwriting if they provide affordable repayment options that limit refinancing, re-borrowing and other risky features such as balloon payments.
It is standard practice in nearly all other forms of lending to determine a borrower's ability to repay. The same should hold true for small-dollar lending.
Many in the payday lending industry contend that federal regulations are unnecessary. But given the
Andrea Levere is president of the Corporation for Enterprise Development.