CFPB cancels protections on payday loans

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The Consumer Financial Protection Bureau has announced plans to roll back its payday loan rule aimed at protecting consumers from high-interest short-term loans. The proposed changes would be one of the first major policy implementations made by new director Kathy Kraninger.

Created in 2018, the payday loan rule aimed at protecting consumers against bad lending practices and repayment abuse. The rollback of some of its provisions, which will take effect in November 2020, has warned consumer advocates of a major rollback in consumer protections.

Why the payday loan rule is being relaxed

The payday loan rule prohibited these lenders from providing loans to consumers who could not afford to repay them. The rule also prohibits lenders from continuing to allow automatic withdrawals from customer accounts after two consecutive failed attempts, protecting customers from overdraft fees.

Critics of the payday loan rule say the data used by the CFPB to create the rule was insufficient. Rep. Dennis Ross, the godfather of the bill passed to overturn ruleexpressed its position in a series of tweets in February last year.

“If @CFPB is going to regulate it must do so with proper data,” Ross tweeted. “CFPB hasn’t done anything resembling comprehensive research for five years. They skimmed what little data they handpicked. »

The written rule is 1,690 pages; 90% of the document is based on research, data and rationale supporting the rule, according to The American Banker.

Ross also argues that regulating payday loans “will hurt low-income Americans” who rely on them. In the same tweet thread, Ross asserts that consumers are not falling into the “debt traps” often associated with loans, stating that “Florida, South Carolina and Illinois have each found that consumers of loans payday leave the market over time”.

Data from Pew Charitable Trusts finds that 76% of payday loans are taken out to pay off old people. Consumer advocates are wary of rollback, saying it does consumers more harm than good.

“The payday rule was developed through years of extensive research and dialogue with stakeholders,” says Rebecca Borné, senior policy advisor at the Center for Responsible Lending. “Scrapping it will particularly hurt communities of color, which payday lenders disproportionately target for predatory lending. The CFPB action today should be a call to action for Americans to speak out against the financially crippling practices of payday lenders.

Why payday loans are so controversial

Payday loans target low-income consumers with poor or no credit scores; about 12 million Americans receive cash through loan programs. To obtain a loan, clients do not need a social security number or credit history; they simply provide ID, employment verification, and banking information to receive a loan.

Arguments against payday loans claim that they target and take advantage of vulnerable consumers. Subprime loans often charge huge interest rates (up to 400%, according to Creditcards.com) and trap consumers in cycles of debt. A study finds that up to 40% of payday loan customers do not know when they will be able to repay their loan.

Newer, safer alternatives to payday loans come with their own set of risks. Installment loans, for example, are proving less expensive for the consumer, according to Pew Charitable Trusts. However, these loans also charge a lot of setup fees and come with superfluous, and often unnecessary, options for add-ons at the time of purchase.

The agency said it would accept public comment on the new measure shortly.

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