How New Payday Loan Rules Will Affect You

(TNS)—The $46 billion payday loan industry is in for a big blow, thanks to the Consumer Financial Protection Bureau (CFPB), which has proposed new regulations that would limit payday lenders’ ability to grant cash advances to borrowers who can’t afford them. Here’s a look at the new payday loans rules proposed by the CFPB.

The controversial payday loans industry is known for offering short-term loans with an average annual percentage rate of approximately 390 percent or higher to borrowers. Faced with such high rates, many borrowers fall into a cycle of endless debt, reported the CFPB.

With more than 19 million American households using payday loans, according to the Community Financial Services Association of America, the CFPB aims to protect consumers struggling to pay bills.

Ensure Borrowers Can Afford Payday Loans

Many payday loans are granted to borrowers who clearly cannot afford to repay them, and the CFPB wants to put an end to the practice. The proposal includes a full-payment test requirement that would force lenders to ensure consumers have the capacity to repay loans by the due date, instead of being forced to reborrow.

The CFPB proposed three repayment routes, including a principal payoff option for some short-term loans and two longer-term choices for those who do not meet the full-payment test.

End of Debt Traps

A 2014 study conducted by the CFPB found that 80 percent of payday loans are rolled over or renewed. To combat this, the proposal includes provisions that make it harder for lenders to coerce consumers into reborrowing or financing debt to satisfy payment obligations.

Borrowers would not be permitted to roll a payday loan over or be granted a similar loan within 30 days of paying off another short-term loan. For high-cost installment loans, borrowers having trouble making payments would not be allowed to refinance their loans into different products with similar terms unless they could prove their financial situation was improving.

Limit Penalty Fees

A CFPB study revealed one-half of consumers with online payday loans incurred penalty fees. These hefty fees averaged $185 in debit failures and overdraft fees from their financial institutions and caused more than one-third to eventually lose their accounts.

The proposal includes a requirement for lenders to give consumers written notice prior to collection attempts. Lenders are also limited to making two unsuccessful collection attempts.

Google Bans Ads for Payday Loans
The CFPB isn’t the only one working to curtail payday loans. Starting July 13, payday loans will be barred from Google ads. The company announced this change in May as a way to safeguard users from predatory lenders.