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Consumer

Latest CFPB Payday Regulations are not as much of a Slam Dunk as the Bureau Believes

As you probably already know, the Consumer Financial Protection Bureau has introduced a new rule that the Bureau believes will effectively put an end to what they call “debt traps” that consumers allegedly wind up snared in due to the payday lending industry. The regulation is more than likely going to be challenged by payday lending advocates, some political leaders and those who work in the payday lending industry. There are many opposed to not just the new regulation, but the Consumer Financial Protection Bureau itself. There are charges being leveled that the CFPB, an arm of the United States government, is unconstitutional in its structure and that it lacks the official authority to implement any type of regulations on the short term lending industry.

When considering the CFPB and its new payday lending rule, it is important to consider not just the structure of the regulation, but the potential obstacles that the Bureau is likely to face in getting the new rule pushed through and made official. There are questions that interested parties need to consider.

How will the proposed payday lending rule actually protect consumers from falling into “debt traps” that some people associate with the payday lending industry? The rule is very comprehensive. To read through all of it, you’d have to be prepared to scour over 13,000 pages. But for all of the details covered in the rule, the descriptions for what makes up an actual payday loan are a big generalized. Some types of short term loans are covered, as well as some longer-term loans. Lenders who make these types of loans will need to comply with the newly created ‘ability to repay’ requirement covered in the rule. This is something that mortgage lenders and credit card companies have had to adhere to for a long time, but is new for short term lending institutions.

This requirement will force lenders to look into the potential borrower’s income, debt situation and then find out whether or not additional debt will work for the borrower. Will the person be able to make the loan payment with their existing debt level? Additionally, this rule forces lenders to consider everyday expenses, like food, utilities and other expenses that borrowers have to deal with. Here’s where it gets sticky – the lenders have to not only make these inquiries, but they have to verify all of the information. This means they will need to get paycheck stubs, credit reports and other documentation about each and every person they have to process loan requests for. These additional checks will likely make the costs of making loans so high, and the overhead costs of running a lending company so unmanageable, that many lenders will have to drop out of the market.

Will the rules even provide new levels of protection to American consumers?

Some experts believe that the new rule will prevent borrowers from “rolling over” too many loans, and that this will prevent people from getting into situations where they are rarely able to realistically pay off the principle of their short term loans. However, the elephant in the room is the fact that if the new rule effectively closes the doors of the majority of payday lending companies, then lower income borrowers, and people with low credit scores will have virtually no access to emergency lines of credit. The traditional banks are of no help to consumers with low incomes and subprime credit when those people need to borrow a few hundred dollars to keep their heads above water. By protecting consumers from loans that they don’t like, while potentially preventing those same consumers from getting access to short term lines of credit, the CFPB has shown that they have not paid a whole lot of attention to creating any type of rule that would benefit American consumers in a realistic manner.

Most Debt Collection Cases Reportedly Closed Amicably

The Consumer Financial Protection Bureau – CFPB for short – documented some very interesting information in their recent semi-annual report to Congress. It turns out, according to exhaustive research done at the CFPB, that the majority of consumers did not dispute debt collection company responses. The CFPB received roughly 85,000 debt collection complaints since the summer of 2013. This information was also included in their recent report that is required as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The most recent semi-annual report was the seventh posted by the Consumer Financial Protection Bureau. And like the sixth report that came out at the end of 2014, the CFPB noted that, “ “As we continue to emerge from the continuing effects of the devastating financial crisis of 2008, we find that debt collection is central and cuts across virtually all credit products: credit cards, mortgages, student loans, payday loans and other consumer loans. Currently, about 30 million consumers – nearly one out of every ten Americans – are subject to debt collection, for amounts that average about $1,500 each.”

The CFPB report went on to say, “Many companies in this industry play by the rules, but others cut corners and seek to gain an advantage by ignoring the rules,” according to the report. “These bad actors are a detriment to every company that is faithfully following the law, and their actions harm consumers.”

Of all the complaints that were filed to the CFPB, 34 percent were complaints about debt collection actions. This report happened to track complaints that were logged between April of 2014 and March of 2015. The addition of debt collection complaints began in July of 2014, by allowing consumers to post complaints in the CFPB’s complaint database.

The most common complaints about debt collection practices were focused on continual efforts by collectors to collect on debts that consumers did now owe on. These types of complaints accounted for about 38 percent of all the debt collection complaints that the Bureau has received. Other cases involved consumer complaints about information being provided to credit reporting bureaus. These complaints indicate that people only learn about accounts that have gone on to debt collection companies after they check their credit reports.

There were also quite a few complaints about the tactics that some debt collection agencies use. 19 percent of the logged complaints included information that indicated these agencies call too frequently or at bad times of the day. Additionally, calls made to places of employment seem to be a major source of contention amongst people who have filed complaints to the CFPB’s database.

Beginning on the first of June, 2015, the Consumer Financial Protection Bureau has already received well over 600,000 complaints. The most common topics of these complaints are issues with mortgage loans and debt collection practices/agencies. It will be interesting to see how all of the different categories shake out in the next semi-annual report that the CFPB provides to Congress. We can expect to see that report some time in December. It is a positive trend to see that people are actually taking action and reporting their complaints to the CFPB. While the Bureau certainly isn’t the ideal body to police most financial industries, the reports to Congress may help with some much-needed financial service reforms in the future. The data provided so far really does show that as much as people complain about debt collection companies, they still go out of their way to handle these issues in an amicable manner.