CFPB and You: Proposed New Rules for Payday Lenders

The Consumer Financial Protection Bureau has issued proposed new rules for payday lenders, with the goal of preventing what abuses it can in the industry. I say "what abuses it can prevent" because, unfortunately, the CFPB has no power to control interest rates, which in the payday lending industry reach astronomical highs. One interpretation of Kentucky's payday lending statute allows for an annual interest rate exceeding 400%. So, seeing that almost 80% of borrowers must re-borrow after 14 days because they can't afford the fees, the CFPB took aim at preventing the "debt trap" by going to the "source": people who borrow more than they can afford to pay back.

The proposed rules require that lenders evaluate potential borrowers' ability to repay before they loan to them. The idea is that this will prevent people from continuing re-borrow every two weeks or month because they cannot afford to pay the entire amount. The way this works in Kentucky, a person may go to a payday lender, borrow $500.00 and have to pay back $589.25 in two weeks. Most often, when the two weeks is up, the person cannot afford to pay $589.25, so they bring in that amount but immediately re-borrow another $500.00 (with another $89.25 fee due in two weeks). Left unchecked, that can mean over $2,000.00 solely in fees per year, without the borrower even beginning to pay down their principal balance. The CFPB believes that if lenders can only loan to borrowers that can repay by the due date, it can prevent harm to borrowers who can't. 

For the borrowers who would otherwise be unable to get payday loans, the rules also propose two options that do not require looking at the borrower's ability to repay. The first requires that, if the borrower is unable to repay their loan when due, the lender can provide subsequent loans, but must reduce the principal each time. The second allows the lender to offer two more loans at the same interest rate, but then must provide an "off-ramp" to the borrower wherein they can pay back the principal without additional fees. 

In any of these cases, a borrower could only receive three loans before having to "cool off" and wait 60 days for the next loan. During that time, I do not know where they might turn if they need additional money. Hopefully, not to the even worse option of online lenders.

While these measures may all help if adopted,  my hope is that instead of these "last resorts," people will turn to less onerous means of making ends meet. Payday loans seem quick and easy, but they are anything but.