New rules proposed for short-term, high-interest loans

Other provisions include making it hard for lenders to push strapped borrowers into reborrowing or refinancing the same debt, and capping the number of short-term loans that can be made in quick succession.

Repeat short-term borrowing: Within a month, nearly 70 percent of payday loan borrowers take out a second payday loan. Kling says there are more payday loan shops in Missouri than there are Walmarts, McDonald’s, and Starbucks combined, almost twice as many. The idea is that these types of loans will fix short-term money trouble but for many it has led to a long-term debt issue and, in some cases, has led to the repossession of property.

Payday and vehicle title loans with interest rates that average more than 300 percent drain in fees annually from the pockets of IL residents who can least afford it, according to a report by the Center for Responsible Lending.

What would the rules do?

But if the payday loan sector dries up, Roberson said there is an opportunity for community organizations and not-for-profits to come together to make safe and relatively low-interest small loans “for the benefit of the community”.

Pew also noted that payday firms have already shifted much of their business to offering high-cost installment loans, which are repayable over a longer period of time but which also commonly charge triple-digit interest. For some people these loans become debt traps that they can never escape from. Currently, the short term loans given to mostly low-income Americans using future paychecks as collateral is a almost $40 billion business. The advocacy group also praised the effort to deter payday firms from repeatedly trying to collect loan payments directly from a customer’s bank account, noting that millions of borrowers get hit with overdraft and other fees.

“We don’t have a usury law here in Nevada”, she said, “and so, the interest rates on the payday or title loans can be anywhere from 30 percent to 1,000 percent”. These loans are usually paid back over time through a series of scheduled payments.

The proposed regulations are likely to face stiff opposition from lobbyists from the payday lending industry and auto-title lending industry, as well as opposition from members of Congress.

How else could the rules affect borrowers? “In doing so, the CFPB can stop the debt trap once and for all”.

The new CFPB rules spurred mixed reactions.

ABA expressed concern that the CFPB’s highly prescriptive proposal could impede innovation by banks - as urged by other regulatory agencies - in small-dollar lending. After, the agency is aiming to have the rule go into effect 15 months after a finalized version is publicly released.

At the opposite end of the spectrum, the Community Financial Services Association of America, a trade group representing the payday lending industry, described the rules as a “staggering blow to consumers“, saying that it would cut off credit access “for millions of Americans”, and adding that it does nothing to address the issue of illegal lenders.