Why It Matters That the Bureau of Consumer Affairs Ditches Restrictions on Payday Loans
The Consumer Financial Protection Bureau (CFPB), the financial oversight agency, made headlines on Tuesday by lifting rules for payday lenders. The revised rules state that lenders no longer need to assess whether borrowers can afford to pay off short-term loans.
The Obama-era rule created mandatory underwriting for any company offering short-term loans. Short term loans, also known as payday loans , are known for their high fees. These loans may have an annual percentage rate (APR) close to 400%, which can make them difficult to repay. Under the original rule, passed in 2017, lenders must determine someone’s ability to repay these costly loans. Before approving a short-term loan, lenders had to check the following details:
- Net monthly income
- Monthly debt payments
- Monthly housing costs
- Basic living expenses
- Debt to income ratio
The original rule was that loans without these guidelines were “unfair and unlawful practice.”
According to the Pew Charitable Trust , the rule worked. “Lenders started making changes even before they officially went into effect, safer loans were starting to come in and harmful practices were starting to disappear,” said Alex Horowitz, senior fellow at the Pew Charitable Trust’s consumer finance project.
But the revised rules have removed those underwriting requirements – and this has resulted in the 12 million Americans who use payday loans each year subject to exorbitant payments, Horowitz said.
Many consumer advocates, including former CFPB director Rich Cordray and others, have also spoken out against the new reform.
“It is truly shocking that the CFPB, an agency created to protect families from financial abuse, is leaning toward the most obscene lenders about the consumers it’s supposed to protect,” Lauren, deputy director of the National Center for Consumer Rights (NCLC). Saunders said in a statement .
To protect families, the organization has asked Congress to set a national interest rate cap of 36%, a move it says has received widespread support from Americans across the political spectrum. NCLC would also like to see interest rate caps at the state level . You can see a full breakdown of each state’s payday lending charters, including maximum loan amounts, loan terms and financing charges here .