Changes Proposed by CFPB to Payday Loans Regulations

Almost 70% of the US consumers rely on short term payday advance cash loans to satisfy their emergency cash needs because these loans provide the required instant money to the borrowers in a very short time span. The elevating demand of these loans give birth to numerous payday lending institutions both store front and online. However, few years back, complaints started coming in against the lenders due to their fraudulence. They used you incur high interest rates and even dragged the borrower to the court in case of repayment failure. To tackle these despairing situations, the Consumer Financial Protection Bureau (CFPB) was created.

CFPB’s main role is to ensure that all the consumers receive fair treatment from all the financial institutions in USA like banks, payday lenders and creditors. So, the set regulations based on consumer financial laws was introduced and the lenders are strictly kept under vigilance to make sure that they strictly and honestly abide to these laws and do not cheat on any of the applicant. But there is one law that has not been enacted yet named as Obama-era payday loan regulation which is aimed to protect citizens from debt resulted from payday loans. CFPB has not included this law yet but is planning to change this regulation in such a way that it will significantly offer the protections for the consumers.

What does Payday Loans Actually Mean ?

Short term instant cash loans ate very different from other traditional lending procedures. Along with their quickest cash providing capability, they incur very high interest rates. They are practiced by the individual payday lending institutions not any bank and credit union is involved in it. A basic summer about this financial aid states that it covers the gap between the immediate moment when the consumer is in dire need of the cash and a short term future date which is generally borrower’s next payday, that’s why they are known as payday loans. Basically, the borrower receives the money against the money he is expected to receive in the form of his salary but pays hight interest rate known as Annual Percentage Rate(APR) which is typically 400%.

Highlights of the Regulation Intended by Obama Administration

The regulation aimed to stop “payday debt traps” was scheduled to take effect in January 2018 to ensure that the lenders thoroughly evaluated how likely the borrower was able to pay back to avoid added interest on missed repayment schedule. This is also know as full payment test. This determines the consumers’ ability to pay back as well as the lenders’ specific requirements as follows:

1.The Full-Payment Test: One way to determine the borrower’s ability to repay the loan without borrowing another to pay the previous one was by establishing the full-payment test. According to this test, Payday lenders would have to determine if the borrower would be able to repay the loan and also cover basic living expenses and other major financial obligations during that time period. The lender could do so by verifying the borrower’s income and the consumer’s credit report.

2. Cooling Off Period: One of the major drawback of these short term loans is that borrowers get stuck into debt cycle by taking out another loan to pay off the previous loan and so on. So, the regulation established a 30-day cooling off period once the borrower tool out 3 loans in a row to stop the debt trap caused by repeated borrowing.

3. Principal Payoff Option: The regulation introduced limit the borrowing amount to $500 for the consumers if they didn’t pass the full payment test. This option included restrictions to protect the consumer, including:

• Not allowing the lender to any collateral
• Not allowing the lender to approve another loan to someone with an outstanding short-term loan
• Enabling a principal payoff option that restricted loan extensions to borrowers who could pay at least one-third of the principal with each extension
• Requiring lenders to disclose the principal payoff option

4. Mandatory Reporting: The regulation would have also required payday lenders to report loan information and update all the information to the major credit reporting agencies.

5. Alternate Options: The regulation would have let lenders offer other longer-term loans to reduce the debt risks for the consumers. One option would have capped interest rates at 28%. The other would have enabled loans repayable in equal sums for a term of no more than two years and at an interest rate of no more than 36%. Lenders would have been also restricted to the number of these optional loans they could offer to the consumers.

Changes to the Regulation

In February 2018, CFPB proposed changes to this law by eliminating full-payment test because according to anonymous reports, one of the CFPB officials said that if this test rule had been implemented that it would exclude nearly two-thirds of potential borrowers from payday loan program. With saying that CFPB intends to delay its implementation till 2020. However, CFPB stated the risk of payday loans itself. It stated that in addition to high interest rate, the debt cycle can potentially damage the consumers’ credit rating. By eliminating some points from intended regulation, CFPB enabled continued risk to consumers from predatory payday practices outlined in 2016.

There has been always dilemma about online payday loans. They have been stayed questionable as well as good financial aid at the same. However, some good alternatives still exist to these loans in the form of credit card and personal but again credit score is the biggest factor to qualify for these loans. So, the short term payday advance loans still stay preferable among the consumers because they do not perform any hard credit checks and anyone can easily qualify for them.