In my last post, I wrote about Google’s change in its ad policy concerning payday lenders. As examined in that post, Google noted the harm these types of loans often cause for consumers. Google is not alone in recognizing the harmful effects of these loans. The U.S. Consumer Financial Protection Bureau (CFPB) has also been looking into the matter.
Yesterday, the Consumer Financial Protection Bureau (CFPB) proposed a new rule addressing the payday and similar type loans. In his remarks yesterday, Mr. Richard Cordray, the Director of the CFPB, recognized that small dollar lenders succeed by setting up consumer borrowers to fail. When a consumer gets into a cash crunch, a trip to a payday lender is sometimes seen as a solution to the problem. These loans are supposed to ease the cash crunch for the consumer until the consumer’s next payday when the loan can be repaid. But frequently this is not the case. Mr. Cordray reported that the CFPB has learned that many consumers cannot pay by their next payday and these consumers are forced to borrow again. This cycle often repeats itself ten or more times for a consumer. To make matters worse, the consumer ends up paying more fees and interest on the same debt making it even harder for the consumer to get out of the trap.
According to Mr. Cordray, a similar trap occurs with single payment auto loans. In these situations, the consumer usually agrees to repay the loan in a single payment plus interest within a short period of time such as thirty (30) days. Mr. Cordray noted that, after analyzing over three million of these type loans, the CFPB discovered that only twelve percent (12%) of these loans are repaid when due and without the consumer rolling over into another loan due to inability to pay. In fact, according to Mr. Cordray, over eighty percent (80%) of these loans are rolled over or renewed on their due date because the consumer doesn’t have the money to pay the loan in full. And about twenty percent (20%) of these consumers will actually lose their automobile because they cannot pay the loan.
In order to help consumers avoid the debt trap that payday loans often cause, the new rule the CFPB is proposing would require these type lenders to assess a potential borrower’s ability to repay the loan. The rule also seeks to curb the fees that can quickly pile up in these types of transactions. By further regulating these types of loans, the CFPB can help protect consumers avoid the dangerous debt trap that these small dollar loans pose to consumers.
Payday lending does not take place in all 50 states. Mr. Cordray noted that approximately 16,000 payday lending stores operate in thirty-six (36) states. Payday lenders are regulated by state law and must also comply with many federal consumer protection laws. The CFPB’s new proposed rule would go a step further by requiring more integrity in the small dollar lending process so that consumers can be helped and not harmed in such situations. There is a wealth of helpful information on this topic on the CFPB’s website at www.consumerfinance.gov.
If you are in a state where payday lending takes place and you are struggling with it, your best option is to visit a reputable consumer protection attorney to learn about all of your options. Our attorneys have been protecting consumers for many years now and we would be happy to have the opportunity to help you.
Ed Woods is the Managing Attorney of several of the Bond & Botes Law Offices throughout Mississippi. He holds a Bachelor of Science from the University of Southern Mississippi, and a Juris Doctorate from Mississippi College School of Law. Ed puts his extensive knowledge of bankruptcy law to use defending consumers from debt collection lawsuits and more. Read his full bio here.