CFPB puts payday lending companies under the microscope
by Carol Thompson
For those who run short on cash before the next paycheck arrives, payday lending companies can prevent financial hardship. Conversely, and according to some experts, the can often cause more hardship than they prevent.
Known as predatory lending, the Consumer Financial Protection Bureau (CFPB) recently announced it is considering proposing rules that would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans. The proposals under consideration would also restrict lenders from attempting to collect payment from consumers’ bank accounts in ways that tend to rack up excessive fees. The strong consumer protections being considered would apply to payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans.
According to CFPB Director Richard Cordray, “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.” He added, “These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.”
The proposals under consideration provide two different approaches to eliminating debt traps – prevention and protection. Under the prevention requirements, lenders would have to determine at the outset of each loan that the consumer is not taking on unaffordable debt. Under the protection requirements, lenders would have to comply with various restrictions designed to ensure that consumers can affordably repay their debt. Lenders could choose which set of requirements to follow.
For consumers living paycheck to paycheck, the short timeframe of these loans can make it difficult to accumulate the necessary funds to pay off the loan principal and fees before the due date. Borrowers who cannot repay are often encouraged to roll over the loan – pay more fees to delay the due date or take out a new loan to replace the old one. The Bureau’s research has found that four out of five payday loans are rolled over or renewed within two weeks. For many borrowers, what starts out as a short-term, emergency loan turns into an unaffordable, long-term debt trap.
Lenders of both short-term and longer-term loans often obtain access to a consumer’s checking, savings, or prepaid account to collect payment through a variety of methods, including post-dated checks, debit authorizations, or remotely created checks. However, this can lead to unanticipated withdrawals or debits and transaction fees. When lenders attempt to get repayment through repeated, unsuccessful withdrawal attempts, consumers are charged insufficient funds fees by their depository institution and returned payment fees by the lender, and may even face account closure. These fees add to the spiraling costs of falling behind on these loan products and make it even harder for a consumer to climb out of debt.
Carrie Witman of Burbank, California knows exactly how difficult it can be for someone to climb out of debt due to payday loans. She learned after her father’s death that he had been taking out the short-term loans, only to have the fees sink him deeper into debt.
“He had retired, and before all of this pension reform, the union treasurer where he worked had embezzled all of the pension fund. The small restitution was divided among the employees, but it was barely enough for my dad to buy groceries,” she said. “After 40 years of working at the same place, he literally left with nothing to show for it.”
Witman said that her father saved his small pension to pay his property taxes each year and took out weekly payday loans to pay for his other bills, including mounting prescription costs, the result of his diagnosis of Parkinson’s disease.
“He never asked me for money or I certainly would have helped him,” Witman said. “When he passed away, not only did I find all of the payday loan papers, the company tried to come after me for what he owed.”
Witman said she had to hire a lawyer to get the company off her back.
The CFPB is hoping to alleviate the issues of payday loan companies by proposing the new regulations that would prevent the companies from taking advantage of those who fall prey to the lenders who are overcharging and aggressively pursuing those who are late with payments.
Image: Flickr/Dan Iggers