Rising income inequality and the recent recession have taken a toll on consumers’ credit scores as well as their pocketbooks. Lower credit scores result in reduced access to more traditional forms of credit, forcing individuals to turn to short-term, high interest-rate credit from more predatory sources. Now, the Federal Consumer Financial Protection Bureau (CFPB) has proposed new rules governing non-prime credit lending that aim to better protect consumers while preserving access to necessary credit.
New rules target payday loans, vehicle title loans
The CFPB was established in 2010 by the Dodd-Frank Act. Its purpose is to educate consumers, supervise financial institutions, enforce federal consumer finance laws, and study available information to better understand financial markets and consumer needs. The Bureau focuses on getting consumers the necessary information to make smart financial decisions. Its proposed new rules, announced in March 2016, would apply to payday loans, vehicle title loans, and some high-cost installment loans and open-ended lines of credit.
A payday loan is a short-term, small loan usually due for repayment at the borrower’s next payday. Typically, the borrower must give the lender a post-dated check for the full repayment amount that the lender can deposit when the loan is due, or access to the borrower’s checking account. Interest rates are usually exorbitant, and if a borrower cannot pay the full amount when due, the lender will roll the loan over, adding new fees which can result in trapping the borrower into a cycle of debt that cannot be repaid.
Vehicle Title Loans
A vehicle title loan is also a small, short-term loan with a high interest rate (annual percentage rates can run into the triple digits) in which the borrower pledges title to his car as collateral. If the borrower fails to repay the loan, the lender can repossess the car.
According to the CFPB, a primary problem with the current situation is that lenders focus more on their own ability to collect on the debt rather than on the borrower’s ability to afford it. The proposed rules require lenders to take steps to ensure that consumers can pay back loans by following either a prevention or a protection approach. If the lender chooses the prevention approach, it must:
- Determine at the outset whether the borrower can repay the loan, including interest, fees, and principal, without defaulting or re-borrowing; and
- Document that the consumer’s financial situation has improved to justify making a second or third loan (i.e., rolling over the current loan) within 60 days of the first loan.
A lender who follows the protection path must:
- Provide affordable repayment options; and
- Not roll over loans more than two times without offering an affordable way out of debt.
The new rules also propose to restrict harmful payment collection practices by:
- Requiring that the lender give notice to the borrower three business days before attempting to access the borrower’s bank or credit union accounts to seek repayment; and
- Limiting repeated unsuccessful withdrawal attempts by lenders that result in excessive deposit account fees.
Consult a Philadelphia consumer protection attorney
It is an unfortunate reality that consumers cannot always trust the companies or financial institutions they do business with. The Kim Law Firm, LLC, stands up for consumers’ rights in a wide variety of matters. If a business has treated you wrongfully, we can help. Contact us for a consultation today.