More than 200,000 low-income U.S households often borrow a brief loan every month. However, when it comes to the paycheck, they have less cash. Therefore, they get something to overcome the situation thanks to the payday loans. However, these types of loans often land them in unwanted debts. This can go as far as their vehicles being possessed and their bank accounts being closed.
[Read: Important Facts about the Regulation of Payday Loans]
On Thursday some rules were proposed by the Consumer Financial Protection Bureau to help Americans avoid many debts. There is a multibillion-dollar industry that the government is seeking to set standards for since it has been regulated at the state level only.
While in Birmingham, Alabama, president Obama was quoted saying, “The idea is pretty common sense: If you lend out money, you should first make sure that the borrower can afford to pay it back.” But if you’re making that profit by trapping hard-working Americans in a vicious cycle of debt, then you need to find a new way of doing business.”
On the other hand, a warning has been given by the payday industry claiming that credit will be available to a few improvised Americans if the rules get implemented. They added that before setting additional rules, the CFPB should further study the borrowers’ needs. The C.E.O of a trade group for companies that offer payday loans registered as Community Financial Services Association of America, was quoted arguing that, “The bureau is looking at things through the lens of one-size-fits-all,”
Payday Loans ‘Disaster’
However, some troubling pictures are also getting revealed. Wynette Pleas of Oakland, California, narrates how she underwent a hard time back in 2012 after borrowing a payday loan. In order to pay the electricity bill and buy groceries, a mother of three, including a blind son, Pleas borrowed $255.
She worked for limited hours only, as a part-time nursing assistant. Upon realizing that she wouldn’t meet the two-week deadline, she told her lender. Despite lacking the funds, the lender attempted to withdraw the repayment straight from Pleas’ bank account. This resulted into a bounced check and a $35 overdraft. Unfortunately, the bank closed Pleas’ account after the incident was repeated five more times.
Pleas and her family started receiving calls from collection agencies. She was astonished to learn that a debt of $8,400 accumulated from the borrowed loan. The possibility of going to jail faced her at that point. Pleas, who is trying to rebuild her life and her finances, said that it was not even worth it.
A Washington-based think tank known as Urban Institute released a Census data analysis stating that in 2013; approximately 2.5 million households received payday loans. Even though hiring has steadily improved, the number of households with such loans has surged 19% since 2011.
Greg Mills, a senior counsel at the Urban Institute, said “These are predatory loan products. They rely on the inability of people to pay them off to generate fees and profits for the providers.”
Greater Due Diligence
Apart from the payday loans, the rules also apply to vehicle title loans. It would be upon lenders to ensure that the borrowers could repay the entire debt on time, before extending a loan due within 45 days. To confirm that borrowers would not default the loan, borrowing history, incomes and other financial obligations would need to be checked.
Generally, a 60-day “cooling-off” period would be given between payday loans and “affordable repayment options” would be required from lenders. Loans couldn’t require a car as collateral, impose multiple finance charges or exceed $500.
In order to regulate high-cost payday loans with payback terms ranging between 45 days and six months, similar rules were proposed by CFPB. Before the bureau revises the proposals for public comments and then finalizes them, a panel of small business representatives and other stakeholders would review all the rules.
A 2013 CFPB analysis on payday lending was followed by the proposals. According to the report, borrowers paid the equivalent of a 339% annual interest rate for an average $392 loan that lasted slightly more than two weeks.
The fees build further since 80% of the loans were rolled over as the median borrower earned under $23,000. Nearly half of payday borrowers had transactions exceeding 10 over 12 months because they had either borrowed again or rolled over existing loans.
Creating Consumer Traps
The executive vice president at the Center for Responsible Lending, Gary Kalman, said, “They end up trapping people in longer-term debt.”
[Read: The Truth about Payday Lenders]
Some states have attempted to curb payday loans. According to a report by the Center for Responsible Lending, Montana and Arizona have capped annual interest rates while Delaware and Washington limit how many loans a borrower can get each year. However, other states take it lightly. According to Texas Appleseed, 1,500 complaints were filed against borrowers to collect money in Texas.