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.