Payday Loans Face Tough Rule Changes from CFPB

The Consumer Financial Protection Bureau has proposed new rules aimed at putting more responsibility on payday loan lenders and their crippling triple-digit interest rates.

The CFPB proposals would require lenders to determine before making a loan whether the borrower can afford to pay it back. The CFPB proposals also call for measures that cap the number of times a borrower can roll over a payday loan and provide a 60-day cooling off period between loans.

The proposed rules would apply only to loans of more than $500. The CFPB has opened a three-month public comment window on its proposals before implementing them.

“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,” CFPB Director Richard Cordray said in a prepared statement. “The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans.”

Average Payday Loan $375

The cost for the typical payday loan is somewhere between $10 and $30 for every $100 borrowed, with the normal charge being $15 per $100 borrowed. The loans are expected to be repaid in two weeks or whenever the borrower’s next paycheck is due.

According to the Pew Charitable Trusts, the average payday loan is for $375. Borrowers would have to pay $56.25 of interest on that loan, which figures to an annual percentage rate (APR) of 400%. By comparison, most credit cards carry APRs of between 12 and 30%.

If borrowers can’t repay the entire amount in two weeks, they typically pay the interest charge — $56.25 for the example used above – and roll the loan over for another two weeks. Bureau research shows that 80% of payday loans are rolled over within two weeks and more than 50 percent get rolled over as many as 10 times, meaning you’d pay $562.50 of interest on a $375 loan.

The new CFPB proposals would cap the number of times a borrower can roll over a loan to just twice.

Reducing Penalties for Insufficient Funds

Many payday loan agreements also give lenders access to the borrower’s bank account. The lender debits the account for the loan amount on the day it’s due. That leads to numerous “insufficient funds” penalties if the borrower doesn’t have enough money in his account to make the lump-sum payment.

The CFPB says that half of online payday borrowers are charged an average of $185 in bank penalties while trying to pay off their loans. The newly proposed rules address that problem too.

Lenders would be required to offer a 3-day notice that they were debiting a borrower’s account. If two attempts to collect the money were unsuccessful, the lender could not make any more attempts to debit the account without authorization from the borrower.

Title Loans Affected by CFPB Proposals

The new rules would also apply to “Title Loans,” the name given to loans in which the borrower puts up a car title as security to back the loan. If the borrower defaults on payments, they must either reborrow the money or risk losing their vehicle.

According to CFPB research, only one-in-eight “Title Loans” are repaid without reborrowing. The CFPB says that 20% result in the borrower’s vehicle being repossessed.

The payday loan industry provides nearly $38 billion a year in loans. Consumers typically use payday loans for financial emergencies such as monthly rent, utility or car payments. The borrowers mostly are people who have poor credit scores or are too young to have built a credit history.

TransUnion, one of the three major credit bureaus in the United States, says that description fits 43% of Millennials, who have a credit scores between 300 and 600 and would be candidates to use payday lenders for emergency situations.

Payday Debt Consolidation Loans

Experts suggest that people in emergency loan situations, especially those who have had to roll over payday loans, look for other solutions, including debt consolidation opportunities. There are payday debt consolidation companies and payday loan relief companies that specialize in helping financially distressed consumers out of situations like this.

One other form of payday loan consolidation would be to use a credit card to get a cash advance. Though the interest rates for cash from a credit card are high, they are not nearly as high as rolling over a payday loan that you can’t afford.

If your credit history is so poor you can’t get a debt consolidation loan on your own, you could find a friend or relative to co-sign a loan for you. Some online lenders cater their business to people with shaky credit.

Joining a credit union could open more opportunities. Most credit unions make small-dollar loans and interest rates are capped at 18% at federal credit unions. There usually is a small fee or membership requirement to join a credit union, but the choices they offer could make it worthwhile.