New Cash Advance Regulation Is On The Way?

Share WithFacebook0Twitter0LinkedIn0Google+0

payday advance regulations to reduce the debt trapThe payday lending industry is huge, and by that we mean it is worth $46 billion. As the major stakeholders in this industry, lenders make massive profits by charging sky high interest rates of 300% and more – a practice that has led to the accumulation of debt traps. But the time has now come for these lenders to keep their eyes peeled as the industry is being targeted by the Consumer Financial Protection Bureau (CFPB).

CFPB has released a proposal that includes new payday advance regulations to reduce the debt trap and also to help borrowers from falling prey to the clutches of these lenders. These rules and regulations are also applicable to advance-deposit products like short term loans that are offered by some of the banks and car title loans.

As said by Richard Cordray, the Director of CFPB, these new regulations will form the basis for ensuring the protection of consumers who can borrow credit that will help them instead of harming them by surrounding them with endless debt. He further added that this is a significant step towards putting an end to the plague of debt traps that have affected the lives of millions of consumers all over America.

But this shouldn’t call for too much of immediate excitement because there is still a long time for these new and improved regulations to be implemented. CFPB first needs to consult a Small Business Panel that is co-run by the Small Business Administration. This consultation will give lenders an opportunity to weigh themselves in and this process can take a few months as they are bound to raise arguments.

A nonprofit research group called the Center for Responsive Politics, keeps a track on money in politics, and said that since the year 1998, the payday lending industry has elevated their spending by 19 fold from $230,000 each year to $4.5 million.

Advance America, among USA’s largest non bank cash advance providers stepped in to join in CFPB’s efforts and the spokesperson for the company, Jamie Fulmer, while giving a statement said that the new regulations are ideal in setting out to eliminate short term loan products and small dollar.

Basically, CFPB’s new rules will not actually eradicate payday loans but will make them less detrimental. Mentioned below are some of the major issues with payday loans and steps planned out by CFPB to fix them:

Cash Advances Have Low Entry Barriers

Borrowers only have to prove that they have a checking account and a job in order to qualify for a payday loan, and title loan borrowers only need a vehicle to qualify. So when borrowers need cash, it is simple to get it from these lenders.

Solution: CFPB is planning to get lenders to toughen lending standards by having to verify the income, borrowing history and the existing debts before approving loan candidates. This will make it difficult for borrowers to take large loans that they find difficult to pay back.

Lenders Create Everlasting Debt Traps

Payday lenders charge outrageous fees and make truckloads of money. When borrowers are unable to pay back loans within 14 days, they take more loans to pay their existing debt and lenders extend them for an even greater fee. CFPB said that 8% of payday borrowers end up rolling over their loans and a Pew Charitable Trusts report found that fees worth $1,200 is taken on an original loan of $1,000 is taken from title loan borrowers.

Solution: CFPB is trying to find a solution for this problem by regulating that borrowers cannot take more than 3 consecutive loans in a year, and lenders will be required to prove that a borrower’s finances have enhanced enough for affordability of other loans before they issue money.

Plus, CFPB is making suggestions of imposing a cooling off period of 60 days so that borrowers who have crossed the 3 loan mark will not be able to borrow more.

Borrowers Are Borrowing a Lot More Than Their Affordability Range

On average, a payday loan is one third of the income of a borrower and an auto title loan is more than 50% says Pew, and this is why they are unable to timely repay the loans.

Solution: CFPB will prevent long term (45 days and more) cash advance lenders from providing loans of more than 5% of a borrower’s monthly income. These lenders can offer loans ranging from $200 to $1,000 on an agreement of keeping interest limited a t 28% (payday loans are being charged at 300 %) and ensuring borrowers have no other outstanding debts.

Join CFPB in a meeting to get updates on their proposal and their future plans regarding the payday lending industry.


Related Video – A hearing about the new car loan rules by the CFPB:


Leave a Reply

Your email address will not be published. Required fields are marked *