CFPB to Reset Payday Loan Protection

The Consumer Financial Protection Bureau announced that it would withdraw its payday loan rule to protect consumers from the high-interest short-term loans. The proposed changes would be one of the first major political implementations of the new director, Kathy Kraninger.

The payday loan rule, introduced in 2018, aimed to protect consumers from bad lending practices and repayment abuse. The withdrawal of some provisions, which should come into force in November 2020, has warned consumer advocates of a serious setback for consumer protection.

Why the payday loan rule is being relaxed

The payday loan rule prohibited these lenders from lending to consumers who did not have the funds to repay them. The rule also makes it illegal for lenders to authorize automatic withdrawals from customer accounts after two consecutive attempts have failed in order to protect customers from overdraft fees.

Critics of the payday credit rule state that the data used by the CFPB to create the rule was insufficient. Rep. Dennis Ross, the sponsor of the bill that was passed to repeal the rule, expressed his stance in one Series of tweets last February.

“If @CFPB wants to regulate, it has to do so with appropriate data,” tweeted Ross. “The CFPB have not done exhaustive research for five years. They skimmed the few dates that they had chosen. “

The written rule is 1,690 pages long; According to The American Banker, 90 percent of the document is based on research, data, and justification in support of the rule.

Ross also argues that regulating payday loans will “hurt low-income Americans” who rely on them. In the same tweet thread, Ross argues that consumers are not falling into the “debt traps” often associated with credit, stating, “Florida, South Carolina and Illinois have each found that payday loan consumers have over the course of the market Leave time. “

Data from Pew Charitable Trusts shows that 76 percent of payday loans are taken out to pay off old ones. Consumer advocates are careful with rollback as it does more harm than good to consumers.

“The payday rule was developed over many years of intensive research and in dialogue with interest groups,” says Rebecca Borné, Senior Policy Counsel at the Center for Responsible Lending. “It will particularly hurt colored communities that payday lenders disproportionately target for robbery loans. Today’s action by the CFPB should be a call to Americans to speak out against the financially crippling practices of payday lenders. “

Why payday loans are so controversial

Payday loans are aimed at consumers with low incomes and poor or no creditworthiness; an estimated 12 million Americans receive cash through the loan programs. Customers don’t need a Social Security number or credit history to get a loan; All you need to do is provide ID, proof of employment, and banking information to get a loan.

Arguments against payday loans claim they target and take advantage of vulnerable consumers. The sub-prime loans are often burdened with enormous interest rates (up to 400 percent according to Creditcards.com) and trap consumers in debt cycles. One study found that up to 40 percent of payday loan customers do not know when to pay back their loan.

Newer, safer alternatives to payday loans come with their own risks. For example, installment loans are less costly to consumers, according to Pew Charitable Trusts. However, these loans also require numerous deployment fees and come with additional and often unnecessary options for add-ons at the time of purchase.

The agency said it would soon accept public comments on the new measure.

About Bradley J. Bridges

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