Can the CFPB's New Payday Loan Rules Curb High Fees and Charges?

Payday loans continue to tempt U.S. consumers, many of whom take the loans, then wind up paying staggeringly high fees that can damage any household budget.

According to Pew Charitable Trusts, 12 million Americans take a payday loan annually, and pay $7 billion in fees alone each year.

"The average payday loan borrower is in debt for five months of the year, spending an average of $520 in fees to repeatedly borrow $375," Pew reports. "The average fee at a storefront loan business is $55 per two weeks."

High fees and the significant debt attached to payday loans has Uncle Sam taking a closer look at the industry. In January, the Consumer Financial Protection Bureau announced it would implement new rules designed to curb industry abuses. Later this spring, likely mid-May, the new rules will be released to the public, but there are some hints on what the CFBP may mandate.

"How the CFPB finalizes its rules will determine whether small-dollar lending will transform into a safe and reliable financial market," says Nick Bourke, director of small business loans at The Pew Charitable Trusts. "The rules will probably prevent some harmful loans from being issued, but to ensure that the millions of loans that are made are affordable and have fair and reasonable terms and conditions, the CFPB will have to set clear, measurable, and enforceable guidelines."

Bourke says the new rules will likely target so-called "covered loans" (short-term loans of 45 days-or-less, in most cases); the "ability to pay" issue that centers on a borrower's reasonable prospects of repaying a loan; and a mandate calling for stronger guidelines on how payday loans are structured, repayment-wise.

Bourke also adds that high cost-loans will continue to be "widely available," with current interest-rate structures remaining firmly in place.

"The CFPB does not have the authority to ban high-cost credit or to regulate interest rates," Bourke states. "Instead, its framework sets conditions lenders must satisfy when making these loans in order to prevent some applicants from getting loans that could be harmful. Although the bureau wisely made borrowers' ability to repay the central theme of its framework, it has not yet established sufficiently clear, objective, and enforceable guidelines describing the quality of loans that people actually receive."

Industry experts generally agree with that sentiment, and there's a sense among those experts the the CFPB should do more to alleviate the problem of high payday loan fees and rates.

"The CFPB has the ability and the opportunity with upcoming rulemaking to make a major positive difference for families in the payday loan marketplace," notes Liz Ryan Murray, policy director at National People's Action, a consumer advocacy group in Los Angeles.

While Congress bars the agency from instituting a rate cap on these loans, there's a lot the CFPB can and should do, Murray says.

"Payday and payday installment lenders rely on trapping people in debt, bleeding them month after month with repeated loans and refinances," Murray says. "The CFPB can short-circuit that by requiring that basic underwriting standards are in place." Additionally, lenders should have to prove that a borrower has the ability to repay every loan - not just that the lender has the ability to collect, she adds. "The CFPB can and should also limit the number of rollover loans or refinances, limit the amount of junk fees and make sure that longer term loans don't front load interest. The potential is there for meaningful reform that will make small dollar lending a safe space, not a predatory space."


Others say, in general, the CFPB seems to be on the right path to curbing excessive payday loan company abuses.

"Although there are potential loopholes that still must be addressed, the CFPB appears to be well on its way to ending the worst abuses of payday lending by requiring that payday lenders do what any responsible lender would do as a matter of course - check to see if a borrower can repay the loan without skipping meals, having the lights shut off or even going bankrupt," says Gynnie Robnett, campaign director of Americans for Financial Reform, part of the Stop the Debt Trap coalition.

Not everyone is taking the opportunity to bash the payday loan industry.

Some industry observers, in fact, say the federal government and consumer advocacy groups would be making a huge mistake in "wiping out an entire industry," in the long-term.

"Payday loans are absolutely required in today's economy," notes Alan Guinn, managing director of The Guinn Consultancy Group, Inc., in Bristol, Tenn. Guinn states the payday loan industry takes on clients no one else will service -- those who are poor credit risks but who need immediate cash. "Banks don't want them as customers, except to charge them huge fees when the last three checks they wrote bounced because their employer -- even though he gave them a paycheck -- didn't have enough in his account to cover their payroll check," he says.

"These are probably not your neighbors," he adds, "but they are your fellow citizens. They may be single parents, or just hard working parents, who budget every dollar every payday and still don't have enough money to keep food on the table, a roof over their heads, or shoes on the feet of their children in the winter. They can't make a political contribution to influence your vote."

Guinn advises setting a maximum rate payable which is acceptable to all, and that will allow pay day loan firms to run a business, make a profit, and still loan the money necessary and important to today's society.

"If society wasn't broken, payday lenders wouldn't exist in the first place," he says.

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