Among the many hard-won initiatives of the Obama Administration was the creation of the Consumer Financial Protection Bureau, which was championed by Senator Elizabeth Warren (D-MA). Prior to the CFPB, consumers would have to contact the financial institution to lodge complaints. The CFPB is the first federal agency that has the authority to enforce regulatory rules that are designed to protect consumers.
Since its inception, Republicans have tried to stop the agency. Unable to block its creation, the GOP-led Congress has made several attempts to curb its authority and limit its ability to function by cutting their funding. When budget cuts didn’t work, they would introduce legislation that would undercut its regulatory authority. In spite of failing at these attempts, the GOP is trying to stop the CFPB from taking on payday lenders, though this time they have some high profile Democrats on board with them.
With names such as Quick Cash, Cash America, and Check Into Cash, payday lenders provide short-term cash advances against a borrowers’ paychecks. The amounts are small, generally $500 or less, and the amount is repaid out of the borrower’s next paycheck.
The lenders charge a fee and a finance charge. On average finance fees range from $10 – $30 for every $100 borrowed. This amounts to an annual percentage rate (APR) of almost 400 percent. The payday lenders are financed through private individuals, as well as major banks like Wells Fargo and US Bank.
Even with the high fees, borrowers that can pay back the loan by their next paycheck minimize the costs of the quick loan. However, the people that use payday lenders are generally unable to do so, with the industry’s own estimates that less than half of borrowers do.
It is no coincidence that payday lenders open storefronts in the poorest sections of town. These people are living paycheck to paycheck, and aren’t making enough to survive the time between. These advances are to cover basic necessities like keeping the lights on or an unexpected car repair. They don’t have the money at the time of the loan, and probably won’t be able to repay with the next paycheck. This means that they get a “rollover” loan to cover the cost of the previous one, and repay both through an installment plan.
The CFPB has no authority to regulate the interest rates, which are set by the states, so the new rules are aimed at giving borrowers protections and a better chance of paying off the loans in a reasonable amount of time. The goal is to prevent and protect against debt traps, as well as provide protection against unfair collections practices. Most importantly, they require that lenders take more responsibility in how and to whom they lend.
The proposed rules require that lenders ensure borrowers have the ability to repay the loan within a specified amount of time. They are to offer reasonable repayment plans, including one that allows the borrower to repay the loan after a certain amount of time of accruing interest.
Furthermore, they wish to limit the number of loans a borrower can receive within a 12-month period to a maximum of three, with a 60-day cooling off period between the second and third loans. Lenders are also not allowed to withdraw payments from the borrower’s checking account without permission and sufficient advance notice of when they will do so.
Analysis of the proposed rules by the PEW Charitable Trusts, a nonprofit that provides research and analysis on various public policies, found that for the most part, the rules provide a foundation for states to build stronger consumer protections. They disagree with proposals that limit how many loans consumers can make, as their research showing borrowers will limit the advances to what they actually need at the moment when they know they can borrow more later if the need arises.
PEW also thinks that the rules should go further by limiting or eliminating short-term loans, require lenders to maintain strict record keeping, and allow fees and interest rates to be refunded if the loan is paid off early.
With the finalized rules expected to be announced soon, the House GOP introduced a bill that would delay the CFPB’s rules for two years and nullify the law in any state that has a payday lending law like the one in Florida. Florida’s law does provide some limits, such as the amount and length of the loan. Nevertheless, borrowers can still find themselves paying an equivalent APR of 500 percent and it has not stopped the cycle of rollover loans, with 76 percent of borrowers in the state using them to repay previous ones.
The bill’s sponsors include Democratic representatives from Florida, the most notable being DNC Chair Rep. Debbie Wasserman Schultz (D-FL). She was part of the state legislature to create the law, and wants the CFPB to incorporate rules that more closely resemble Florida’s, which was supported by the payday lending industry. The seven Democratic sponsors include other Florida reps. Consumer groups say Florida’s law is a sham and the one proposed by Congress is equally dangerous.