New Rule from Consumer Financial Protection Bureau on Payday Loans Favors the Borrower

A small victory for the American working man and woman. But this is what it’s going to take—an aggregate of these small, incremental gains—to ultimately undo the enormous unfairness perpetrated on this country since the 1980s by a cabal of ruthless billionaires concerned solely with their own interests. We could start with an effort to reverse the recent Congressional defeat of a measure that would have allowed class action suits by consumers against bank malfeasance (which might have prevented Wells Fargo from committing its predatory offenses against its customers).

Since the federal Consumer Financial Protection Bureau opened its doors in 2011, the agency’s investigations and enforcement actions have returned more than $12 billion to auto buyers, homeowners, credit-card holders and other borrowers who were victimized by deceptive or predatory practices. Consumers who have been trapped in debt by the notorious payday lending industry will now get extra help from the bureau with a rule imposed this month.

These lenders advertise as “easy” the short-term loans that come due in two weeks. The borrower typically writes a postdated check for the full balance — including fees — or allows the lender to electronically debit funds from his or her checking account. The borrowers often take out another loan to pay off the first, falling to a cycle of increasing debt.

The bureau found in a 2014 study of about 12 million payday loans that only 15 percent of borrowers could repay the total debt without borrowing again within two weeks. Nearly two-thirds of borrowers renewed the loans — some more than 10 times — paying heavy fees that further eroded their financial standing. Strikingly, the bureau found that most people pay more in fees than they originally borrowed.

The new rule limits how often and how much customers can borrow. And lenders must take the common-sense underwriting approach, determining whether the borrower can pay the total loan and still meet living expenses.

Borrowers can take out one short-term loan of up to $500 without that test, as long as it is structured so that they are not automatically trapped into borrowing again. The rule also limits the number of times the lender can debit the borrower’s account, so borrowers can contest erroneous withdrawals.

The payday industry is predictably crying wolf, arguing that the new restrictions will dry up credit in some areas. In truth, payday loans will continue at lower profit margins — stripped of the debt trap. Beyond that, small banks and credit unions are beginning to realize that they can make money in the small-loan business without predatory tactics.

Payday industry leaders are urging Congress to overturn the rule through the Congressional Review Act, which lets lawmakers nullify regulations within 60 legislative days. But vulnerable lawmakers will be hesitant to vote for predatory lending tactics that drive people into poverty.

The Trump administration could undermine the regulations after the bureau’s director, Richard Cordray, leaves office or when his term expires next summer. Consumer advocates need to remain vigilant against that possibility.

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