President Obama is slated to present the new regulations set forth by the Consumer Financial Protection Bureau (CFPB) for the ever-popular and often predatory payday loan industry. The speech, to be given today in Birmingham, Alabama, in addition to presenting the regulations will also tout the young agency that put them together. The CFPB was a part of the 2010 D0dd-Frank financial law. Their mission is to “make markets for consumer financial products and services work for Americans—whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.” For People like Carl Anthony Vaughn II these regulations come a little too late.
Carl’s first experience with payday loans (90 percent of payday loan business is repeat customers) was for $400 in 2009. “Because of the interest, I owed about $475 by the time I got my next paycheck. Because of that, I had to take out another loan for about $375 just to cover everything. This occurred for about two months, until I had to get a tire replaced on my car. That made is so that I couldn’t continue paying the loan”.
Payday loans are designed to offer short-term relief to cash-strapped customers, often with loans designed to bridge the gap between paydays and are often set to be repaid within 45 days. On the whole however, payday loans are often guilty of predatory practices that result in payments that equal the sum of the loan many times over and leave borrowers with a massive, often unpayable debt. According to the Center for Responsible Lending, “a nonprofit, non-partisan organization that works to protect home ownership and family wealth by fighting predatory lending practices,” the average payday loan interest rate is between 391 to 521 percent. In comparison the average personal bank loan can average up to 20 percent.
As Vaughn explains “The interest bumped it back up to over $500 until I got sent to collections because of it. I never tallied up the total amount that I’d paid to them, but it was easily about $500 in interest alone”.
The CFPB regulations would require short-term lenders who offer payday and title loans to ensure that borrowers can repay the loans a fashion similar to standard longer term loans. In addition, the regulations would ensure that lenders provide affordable options instead of the current loan packages with exorbitant interest rates. In a statement, CFPB Director Richard Cordray said “Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.”
For borrowers like Vaughn the results of predatory payday loans can be financially devestating “My credit score suffered, making it more difficult to do almost anything financial. The bank account that I had went into negative until they closed it down. Because of that, I had to go elsewhere to get another account, and they would only let me get a starter account (meaning I had to pay $75 per month for the account for a year and I could only spend $200 per day through the account). I finally dug my way out of it back in 2012″.
Payday lenders have found themselves under great scrutiny as of late due to a number of borrower horror stories. Payday lenders are also finding themselves in an array of legal trouble. MoneyMutual, a payday lender made popular by their spokesperson Montel Williams was recently fined for misconduct in New York relating to their absorbent APR’s which ranged from 261 to over 1,300 percent interest. Unlicensed lenders by law are capped at 16 percent interest while licensed lenders are capped at 25 percent.
Following the proposal of the CFPB payday regulations time will be set for public and industry commentary at which point the regulations as proposed will be made final.