By Jane E. McNamara
President & CEO
The Consumer Financial Protection Bureau (CFPB) just announced that it will propose rules to regulate payday lenders. The Bureau said it seeks to end “payday debt traps” by requiring lenders to take steps to make sure consumers have the ability to repay their loans. They would also limit the number of loans a borrower could take out over the course of a year.
At GreenPath, we see the results of high-interest, payday lending practices every day. Clients are often unable to pay off the initial payday loan and, in turn, find it necessary to take out an additional loan, to help pay off the first. This domino effect continues as the consumer’s debt grows each month.
According to a recent news release from the CFPB, the proposals under consideration provide two different approaches to eliminating debt traps – prevention and protection.
Under the prevention requirements, lenders would have to determine at the outset of each loan that the consumer is not taking on unaffordable debt. Under the protection requirements, lenders would have to comply with various restrictions designed to ensure that consumers can affordably repay their debt.
The strong consumer protections being considered would apply to payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans. For more information, read a news release from the CFPB here.
According to CFPB director Richard Corday: “Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.”
We applaud the CFPB’s efforts to protect consumers through enforcement of responsible lending practices.