By: Phil Bradford on 2020-10-14
The Consumer Financial Protection Bureau (CFPB) has issued a final update in new payday loan rules on 7th July 2020, to impose new limits on payday lending and revoke the provisions given during the Obama-era. The original or old payday loan rules were meant to restrict lenders who were disproportionately targeting low-income borrowers to provide high-interest payday loans. As per the rule, the lenders should ensure the affordability of a borrower before offering another payday loan.
But it wasn’t a long-lasting rule. The CFPB has done it previously in 2019, and the final blow has landed in 2020. In Feb 2019, the federal consumer finance judge announced plans to roll back the Consumer Financial Protection Bureau’s 2017 CFPB payday loan rules, which were drafted during the Obama-era. The CFPB director Kathleen informed in 2019 that CFPB would revoke the main part of the rule, where payday lenders needed to analyze a borrower’s affordability and other information such as additional income, rent, and even student loan payments, before granting more money to low-income borrowers. The bureau explained that the provision decreased the “access to credit and competition in states that have determined that it is in their residents’ interests to be able to use such products.”
In July 2020, under new leadership, the CFPB released a CFPB payday loan final rule regarding payday and certain high-cost installment loans. It also doesn’t require lenders to verify the borrower's affordability to pay off the loans. In a statement on July 7th, the CFPB stated that “rescinding the mandatory underwriting provisions of the 2017 rule ensures that consumers have access to credit and competition in states that have decided to allow their residents to use such products, subject to state-law limitations.” The CFPB also added that there were “insufficient legal and evidentiary bases” which were used to mandate the underwriting provisions.
However, the CFPB didn’t remove the restrictions that stop payday lenders from collecting payments directly from a borrower’s bank account in the cfpb payday loan final rule. Some payday lenders try to recover their debt by withdrawing money directly from borrowers’ checking accounts. It happens as borrowers allow lenders to access the account as per an agreement of the loan. But unexpected money withdrawals done by the lender may increase overdraft fees and damage the borrower’s credit score.
Let’s have a glimpse of the CFPB payday loan final rule:
Summary of the Rule
On November 17, 2017, the Bureau published a final rule (2017 Final Rule or Rule ) establishing consumer protection regulations for payday loans, vehicle title loans, and certain high-cost installment loans, relying on authorities under title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or Act). The 2017 Final Rule addressed two discrete topics. First, the Rule contained a set of provisions with respect to the underwriting of covered short-term and longer-term balloon-payment loans, including payday and vehicle title loans, and related recordkeeping and reporting requirements. These provisions are referred to herein as the “Mandatory Underwriting Provisions” of the 2017 Final Rule. Second, the Rule contained a set of provisions, applicable to the same set of loans and also to certain high-cost installment loans, establishing certain requirements and limitations with respect to attempts to withdraw payments on the loans from consumers' checking or other accounts. These provisions are referred to herein as the “Payment Provisions” of the 2017 Final Rule.
The Rule became effective on January 16, 2018, although most provisions (12 CFR 1041.2 through 1041.10, 1041.12, and 1041.13) had a compliance date of August 19, 2019. On January 16, 2018, the Bureau issued a statement announcing its intention to engage in rulemaking to reconsider the 2017 Final Rule. A legal challenge to the Rule was filed on April 9, 2018, and is pending in the United States District Court for the Western District of Texas. On October 26, 2018, the Bureau issued a statement announcing it expected to issue notices of proposed rulemaking to reconsider certain provisions of the 2017 Final Rule and to address the Rule's compliance date.
On February 14, 2019, the Bureau published a notice of proposed rulemaking (2019 NPRM) to revoke the Mandatory Underwriting Provisions of the 2017 Final Rule. The 2019 NPRM did not propose to amend the “Payment Provisions” of the 2017 Final Rule.
The Bureau is finalizing the amendments to the regulations as proposed in the 2019 NPRM. Specifically, the Bureau is revoking: (1) The “identification” provision, which states that it is an unfair and abusive practice for a lender to make covered short-term loans or covered longer-term balloon-payment loans without reasonably determining that consumers will have the ability to repay the loans according to their terms; (2) the “prevention” provision, which establishes specific underwriting requirements for these loans to prevent the unfair and abusive practice; (3) the “principal step-down exemption” provision for certain covered short-term loans; (4) the “furnishing” provisions, which require lenders making covered short-term or longer-term balloon-payment loans to furnish certain information regarding such loans to registered information systems (RISes) and create a process for registering such information systems; (5) those portions of the recordkeeping provisions related to the mandatory underwriting requirements; and (6) the portion of the compliance date provisions related to the mandatory underwriting requirements. The Bureau also is revoking the Official Interpretations relating to these provisions. The Bureau is making these changes to the regulations based on a re-evaluation of the legal and evidentiary bases for these provisions.
The Bureau revokes the 2017 Final Rule's determination that it is an unfair practice for a lender to make covered short-term loans or covered longer-term balloon-payment loans without reasonably determining that consumers will have the ability to repay the loans according to their terms. For the reasons discussed below, the Bureau withdraws the Rule's determination that consumers cannot reasonably avoid any substantial injury caused or likely to be caused by the failure to consider a borrower's ability to repay. The Bureau also determines that, even if the Bureau had not revoked its reasonable avoidability finding, the countervailing benefits to Start Printed Page 44383consumers and competition in the aggregate from the identified practice would outweigh any relevant injury.
Further, the Bureau revokes the 2017 Final Rule's determination that the identified practice is abusive. The Bureau determines that a lender's not considering a borrower's ability to repay does not take unreasonable advantage of particular consumer vulnerabilities. The Bureau also withdraws the Rule's determination that consumers do not understand the materials risks, costs, or conditions of covered loans, as well as its determination that consumers do not have the ability to protect their interests in selecting or using covered loans.
Data courtesy - federalregister.gov
Why this CFPB payday loan final rule can be problematic
Consumer advocates and democrats declared that the Trump administration is deliberately wiping out essential protections for vulnerable borrowers from the payday loan rules during the global pandemic and recession.
Alex Horowitz, a senior research officer with Pew Charitable Trusts’ consumer finance project, added - “By eliminating the ability-to-repay protections, the CFPB is making a grave error that leaves the 12 million Americans who use payday loans every year exposed to unaffordable payments at annual interest rates that average nearly 400%.”
But why are they giving such statements? Let’s find out briefly.
The new payday loan rules are declared by the CFPB when the consumers are desperately searching for credit. About 1 out of 3 Americans have lost their jobs due to the COVID - 19 pandemic, as informed by the Financial Health Network’s 2020 U.S. Financial Health Pulse, a survey of over 2,000 U.S. adults fielded between April 20 and May 7, 2020.
Nearly 12 million people every year opt for payday loans, mostly to pay for necessities like rent payments or utility bills, credit card bills, etc. Single parents and low-income people are highly dependable on such loans. Among the American consumers, who have reported losing jobs, 3% of them stated that they’ve borrowed money via payday loans, deposit advances, or pawn shop loans. Apart from that, 16% of financially distressed people have sold their belongings to get money, and 12% borrowed money from payday loan lenders, deposit advance, or pawn shop loan.
Borrowers can get payday loans easily, but it is difficult to pay them off. Borrowers can take out payday loans by walking to a lender and providing few documents such as a valid ID, proof of income, and a bank account. Payday lending doesn't have too many requirements or collateral such as mortgages or auto loans.
Most of the lenders provide payday loans along with a “finance charge” (service fees and interest), which a borrower must pay while taking out the loan. Normally, the average APR on a payday loan is about 400%. Why do lenders demand such a high rate of interest on payday loans? Lenders might explain that the high rates are necessary as payday loans are available with a little paperwork, and risky to finance as they are difficult to recover.
The loan balances are usually due in two weeks, typically on the next payday. Most of the borrowers can’t pay back the entire amount with interest, within the 14 days. So, the interest is charged again on the net value (principal + interest). Gradually, the amount of payday loan debt reaches such a limit that it becomes nearly impossible to pay for a borrower, who is already in a financial crisis.
So, as per the CFPB payday loan final rule, if lenders do not verify the affordability of the borrower before providing him payday loans, the borrower might take out an amount that he/she can’t pay back at all. So, he/she might end up into a cycle of borrowing and piling up payday loan debts, which gradually destroy his/her finances.
The existing director of the CFPB, Kathleen Kraninger, said that the new payday loan rules would “ensure that consumers have access to credit from a competitive marketplace.” But Charla Rios, a researcher at the Center for Responsible Lending, added - “Any kind of loosening of regulation during this pandemic, specifically around this COVID-19 crisis, is just really, really hard to swallow, knowing that people are struggling financially. It feels like this rule has kind of opened the door for things to become even worse for a lot of consumers.”
Now, it is up to each state to decide whether or not and how to regulate payday lenders. As of now, 32 states have permitted payday lending, and other 18 states and the District of Columbia have either banned them entirely or have capped interest rates.
How to deal with the unaffordable payday loans and save money
If you are one of the borrowers who have payday loan debts and can’t afford to pay them, then you can expect a few situations.
They are as follows:
- Money withdrawals from your bank account directly or collection calls from lenders.
- Receiving threats from lenders or collection agencies that you‘ll be dragged into the court.
- Receiving an offer on settling payday loans from the lender.
- Receiving court summons.
To deal with all the above-mentioned situations, the best option you get is to search for popular payday loan settlement companies and select the best one to settle payday loans.
When should you opt for a payday loan settlement?
Practically, being a borrower, you may opt for payday loan debt settlement when you encounter the following situations:
- If you can’t afford to make payday loan payments and want to reduce payday loan debt burden.
- If you want to stop lenders from withdrawing money from your account or stop ACH debits.
- If you want to stop harassing debt collection calls.
- If you want to grab a lucrative payday loan settlement offer and save money.
How to get help from payday loan debt settlement companies
If you wish to handle your finances and want to initiate payday loan debt settlement all by yourself, you’ll have no support or no professional advice to guide you through the process. It will be your first time to do a payday loan negotiation with the lenders. So, there are chances that your lenders may confuse you with the payday loan state laws, industry rules, or with their cunning negotiation skills. As a result, you might end up having nothing in your pocket.
But if you get help from a reputable company that deals with the payday loan debt settlement process, they will provide you with all the information about settling your debts. You might be signing up for a program that will help you to get out of payday loan debt quickly. The company will deal with your payday loan accounts, negotiate with lenders, and will reduce abusive collection calls. They will also help you to settle your payday loans with maximum savings.
How to choose the best payday loan debt settlement offer and save more
Being a borrower you must choose the right offer to get the most benefit and save more. So, remember these points while choosing the best offer:
- You should not be paying any additional finance charges..
- The settlement amount is usually 50% less than what you owe.
- The lender agrees to settle the account as ‘Paid in full’ or ‘Paid as agreed’ in your credit report so that your credit score remains intact.
Conclusion
According to the CFPB payday loan final rule, borrowers may find it difficult to afford high-interest payday loans. But, borrowers may manage this situation by getting help from a non-profit payday loan settlement company and settle their debts once and for all. Borrowers must also remember that all settlement offers aren't beneficial for them. They must reject a settlement offer if they aren’t getting any written settlement agreement letter, and the settlement company doesn’t follow the FTC laws. Apart from that, borrowers must consider their affordability for the new payoff amount, too.
With proper help you can
- Lower your monthly payments
- Reduce credit card interest rates
- Waive late fees
- Reduce collection calls
- Avoid bankruptcy
- Have only one monthly payment