Cheap and Safe Loans
Ever since federal regulators proposed new rules in the payday loan market, they’re being excessively discussed and scrutinized. When these rules get finalized, they’ll change the game of lenders that pay loans to an average of 12 million people per year.
The regularity authorities claim that these rules, when implemented, will change some of the most unethical practices taking place in this $38.5 billion industry. Richard Cordray, who happens to be the director of the CFPB i.e., Consumer Financial Protection Bureau revealed that a large number of borrowers who opt for a quick cash fix are slapped with unaffordable loans that change into long-term dept. The recent rules of CFPB address these rising concerns with the following changes:
For every loan that exceeds $500, the lender will be obligated to check the credit history of the borrower and determine whether the borrower can manage to repay the lent money after fulfilling all other obligations. If the borrower is not capable of repaying the loan without re-borrowing within thirty days, the lender will be prohibited from granting the loan.
According to a study of Pew Charitable Organization, the average payday loan is almost $375. For payday loans less than $500, the lenders will not be obligated to perform the repaying test. However, they’ll be prohibited to lend money to any such borrower who is indebted by other outstanding loans. Also, once the borrower is granted the loan, the lender can only offer a maximum of two extensions with the condition that the borrower has been able to repay at least some amount (one-third) of the loan with every extension. The lenders will also be prohibited from taking an auto title with such loans as collateral.
Dangerous Debit Practices
Before debiting the bank accounts of borrowers for payment, the lenders will be required to give an official written notice to the borrower. Also, after two unsuccessful collection attempts, the lenders will again need to ask for the borrower’s permission. According to recent estimates of the regulators, the proposed rules could affect almost 80% of the current lending volume of payday loans. These rules will most probably hit the market in 2017. The Consumer Financial Services Association of the United States believes that these rules will be challenging for the giant lenders as they’ve become accustomed to their unlawful and unethical payday loan lending practices. However, these rules will propose no harm to the poor consumer group. Rather, they’ll provide them the necessary financial safety.
Critics believe that further regulations should also be imposed on the payday loan market. One of such important regulations is regarding the high interest rate. Currently, the CFPB isn’t regulating these high interest rates. Due to this reason, the lenders are charging much higher than the widely accepted 36% APR rate cap. Therefore, it’s expected that the new CFPB regulations may undergo certain amendments and include limitations on the chargeable payday loan interest rate.