The payday loan industry has been plagued by issues, with borrowers complaining left and right, and onerous policies coming back to bite them should they fail to make timely repayments. Payday loans often find consumers paying an exorbitant amount of interest, thus nullifying the benefit of a quick cash advance to make ends meet while waiting for one’s pay to come in. With those complaints and other issues in mind, federal regulators are creating a new set of guidelines that would serve as the first-ever for the payday loan industry.
The Consumer Financial Protection Bureau said recently that state laws on payday loans are often rife with loopholes, and do not give consumers enough protection, or offer them with enough transparency. Fees and interest rates are often not communicated clearly to consumers, who sadly have to pay interest at an annual percentage rate of 300 percent, or even more.
The rules should be finalized later in the year, and once they are, this would be the first time the CFPB has flexed its muscle under the 2010 Dodd-Frank law with regards to payday loans. The CFPB had made its own efforts to crack down on unscrupulous payday lenders, as it had chased ACE Cash Express for $10 million a few months ago, after it was found that the lender had been applying undue pressure on borrowers to either pay up or take out more than one loan.
Generally speaking, payday loans are considered cash advances, and they allow consumers to borrow about $500 or less. Mechanics usually entail having borrowers furnish a personal check dated for the coming payday for the complete balance, or authorize their lender to take the payment out of their bank accounts. Charges usually range from $15 to $30 per $100 of the loan’s value, and considering the fact that that represents a sizable chunk of a hundred dollars, it is not uncommon for borrowers to be forced to pay so-called “rollovers,” or interest-only payments.
Keeping the prevalence of rollovers in mind, the CFPB addressed the high percentage of states that allow unreasonable interest rates on payday loans. The watchdog group said that there are now 32 states that allow payday loans wherein the interest rate is capped at triple digits, or not capped at all, meaning unlimited interest to be charged to consumers. Also, three states – Louisiana, Ohio, and South Dakota – had tried to impose broad restrictions on onerous payday loans previously, but had ultimately failed. The CFPB is not permitted to impose interest rate caps, but as a federal group, it can label industry practices as deceptive, unfair, or abusive.
In a statement, CFPB associate director for research, markets, and regulation David Silberman said that payday loans often amount to a “long-term and expensive debt trap.” According to the bureau’s findings, over 80 percent of payday loans have rollovers, or are followed up by a subsequent payday loan within the next two weeks. Also, about 50 percent of these loans were found to be part of a string of at least ten separate loans.