CFPB Called Upon to Toughen Payday Loan Standards
In a recent opinion piece for the New York Times, Executive Vice President and Director of Federal Policy at the Center for Responsible Lending, Gary Kalman, calls upon the Consumer Financial Protection Bureau (CFPB) to crack down on standards for payday loans – standards that currently cause more problems for low-income consumers than they resolve.
Payday loans have an intense gravitational pull and are characterized by colossal interest rates that often to leave borrowers in a worse financial state than before they took the loan; especially when borrowing from predatory lenders who won’t hesitate to take advantage of consumers desperately in need of money.
“New rules must include limits on repeat borrowing and duration of indebtedness to keep predatory lenders from pushing consumers into increased risk of losing bank accounts, their foothold into the mainstream financial system, and of entering bankruptcy.”
In many instances, borrowers turn to payday loans during times of financial hardship. Taking one step forward and three steps back, these borrowers eventually rely on the same alternatives that were available to them before they took out the payday loan (assistance from friends/family, re-budgeting finances, cutting back on spending), just to recover from the debt incurred through the payday loan itself.
But with payday loan interest rates averaging around 391%, it’s no surprise that borrowers who fall into the “payday loan trap” have tremendous difficulty getting out of it.
Because of these trends, Kalman also urges the CFPB to “instate specific protections when lenders have access to borrower bank accounts.”
When lenders have direct access to a borrower’s bank account, they will often take funds as soon as the borrower’s next paycheck is deposited. This action forces the borrower in a corner, which may leave them with far less money than they need to cover necessities, such as food costs and utility bills.
“Payday lenders have a long history of dodging regulation that targets abusive practice. To ensure any new rule is effective… it must be comprehensive to protect against attempted evasions. It cannot allow any loopholes or sanction high-cost, poorly underwritten loans. The CFPB must add protections for borrowers and not undermine strong, existing state laws that have helped curb the debt trap.”
How do you feel about Kalman’s petition to the CFPB? Do you believe we need to apply tougher standards to payday lenders? Please, let us know your thoughts in the comments.