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Regulators are planning a crackdown on payday loans

06 October 2017

Consumer Financial Protection Bureau Director Richard Cordray speaks during the 2017 AFL-CIO Labor Day Picnic at Coney Island in Cincinnati.

A tough new rule laid out by federal regulators Thursday will make payday loans and other types of high-risk borrowing safer for consumers.

Currently, payday and auto title lenders in OH are exploiting a loophole in state law in order to broker loans of more than 45 days with unlimited fees and no consumer safeguards, and those longer-term loans are not covered by the CFPB's recent action which only covers loans lasting 45 days or fewer. The rules would set limits on the number of times a borrower could renew. Most borrowers, however, can't afford to repay these loans and end up rolling them over each week. "Curbing the ability to push borrowers that borrowers certainly can't repay an integral protection".

Payday loans are a small, scorned part of the financial industry. The industry, which functions over 16,000 stores in 35 nations, will more than likely see thousands of payday lending store closures nationally.

The Pew Charitable Trusts says 12 million Americans use payday loans every year and pay an estimated $9 billion in fees.

A key goal is to prove that borrowers, who are often in dire financial situations, are able to pay without having to renew the loan repeatedly. In California, the most significant payday loan market, replicate borrowers constructed 83 percent of the industry's loan volume. The number of loans made would likely fall at least 55 percent, according to the consumer agency's projections. "For too long, our state legislature has waited for others to solve the payday loan problem". And the loans often come with steep fees.

The CFPB aims to put a stop to this by preventing borrowers from ending up with a series of loans (each with steep fees) to refinance the same debt.

The payday-lending rules do not require congressional approval. The loan would be due two weeks later - plus $60 in interest and fees. Sherrod Brown (D-Ohio).

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Under the new rule, consumers who want to borrow less than $500 can do so without the full-payment test if the loan is structured in a way that would allow the borrower to get out of debt more gradually. "In addition, we are proposing changes to clear up confusion about when to provide periodic statements with important loan information to borrowers in bankruptcy".

But servicers were confused about the frequency of sending intervention notices to customers who had requested under the Fair Debt Collection Practices Act that companies limit contacting them, raising concerns about how they could follow different federal rules that had conflicting requirements.

Industry officials said Thursday that they would file lawsuits to block the rules from taking effect in 2019 as scheduled.

The payday rule cuts off access to credit for those who need it, says Dennis Shaul, CEO of the Community Financial Services Association of America, a payday lending trade group.

The industry's forecasts of the rules' impact are starker. The final rule is almost 1,700 pages - more than 300 pages longer than the proposed rule. You can either repay the loan in a single payment or have up to two subsequent loans where the principal is steadily paid down, which will help you pay off the debt by making payments that reduce principal first.

The rules are also likely to agitate the CFPB's already frustrated critics.

The buyer Financial Protection Bureau's rules largely represent exactly what the agency suggested a year to get an industry where the yearly rate of interest on a payday advance may be 300 percent or even longer.

Currently, a cash-strapped customer might borrow $400 from a payday lender. That lawmaker, U.S. Rep. Jeb Hensarling, has voiced frustration with the looming question of what he described as Cordray's "personal political ambitions". His term doesn't end until next year. Even putting such loans into 15 pages would be a challenge. "As the Trump administration successfully continues to roll back harmful, Obama-era policies, the next place they should look to continue this effort is to immediately freeze all CFPB rules", Ken Blackwell, former adviser to the Trump transition team and former OH state treasurer, said in a statement.

Regulators are planning a crackdown on payday loans