The Consumer Financial Protection Bureau (CFPB) just repealed a set of rules and regulations that were put in place to protect payday loan borrowers – and this action may expose these borrowers to high fees and a “debt trap” that may be inescapable. Let’s take a look at what happened now, and explain why it matters.
The 2017 Payday Lending Protections That Were Overturned
The CFPB first released a multi-part payday loan regulation in 2017 to help protect the 12 million Americans who use payday loans from falling into a “debt trap” that makes it difficult – or impossible – for borrowers to repay payday loans.
Payday loans are among the most expensive types of loans available, with a typical APR (interest rate) exceeding 300%. For comparison, even the most expensive personal loans for bad credit usually do not exceed 20-30% APR.
However, payday loans serve as a lifeline for many people who may not have other options, face unexpected bills and may need an emergency loan to cover expenses. In recognition of this, the CFPB sought to protect borrowers by requiring payday lenders to verify information such as income, cost of rent, student loan payments, and other financial information – essentially, requiring a payday lender to ensure an individual would be able to repay the money they borrow.
However, these Obama-era rules were blocked from going into effect – and the Trump administration called for a review of these regulations. Then, on Tuesday, July 7, a finalized rule was released that eliminated this provision – there will be no requirement that payday lenders check if borrowers are able to repay their loans.
Borrowers May Have Trouble Repaying What They Owe
According to the CFPB, the regulation requiring lenders to check the ability of borrowers to pay was removed to “ensure that customers have access to credit and competition…” and there was “insufficient legal and evidentiary bases” for the requirement to verify income for borrowers.
Some of the Obama-era protections were ratified – including blocking payday loan companies from repeatedly trying to withdraw funds directly from bank accounts, a practice that could lead to hundreds of dollars in overdraft fees if a borrower did not have access to the required funds.
Still, this regulation exposes some Americans to difficult situations, where they may borrow from a payday loan company without a full understanding of the involved fees, and have trouble repaying loans. According to the CFPB, a full 80% of payday loans are “rolled over” or re-borrowed, meaning their loan term is extended or renewed because the borrower could not pay. A Pew research study shows that only about 14% of payday borrowers “can afford to repay” their loans.
With a lack of consumer regulations to protect them, it’s more important than ever for payday borrowers to be aware of their financial situation, explore their borrowing options thoroughly, and make the right choice.