Many of today’s payday lenders might have to shutter their doors if rules this week made by the Consumer Financial Protection Bureau as is are to go into effect. However, the changes are up against strong headwinds from a Congress controlled by Republicans.
One of the new rules would require that auto title and payday lenders determine if a borrower is able to afford to repay their loan in full in 30 days.
That may thwart the business model that advocates for consumers say relies on rolling over of unpaid loans with exorbitant fees being accumulated and interest reaching over 300%.
The new proposed regulations would also limit the times that a lender could debit the account of the borrower without needing a new authorization to do so.
That part of the new regulations comes due to many borrowers of payday loans ending up creating an overdraft in their accounts that incurs additional fees and forces the borrower to close the account.
Too many times, borrowers who are in need of almost instant cash will end up trapped in these types of loans that they cannot afford to pay back, said the Director of the CFPB Richard Cordray.
However, Cordray says that the rule’s “protection of ability to repay” provision that uses only common sense, prevents lenders from always succeeding through setting up its borrowers to fail.
A study done in 2014 by the CFPB was able to find that the overwhelming majority of payday loans were not repaid on time, with over 80% rolled over or followed with another loan within a two-week period.
The study also found that over 15% of the new loans are followed by loans that continue for up to 10 loans before being paid off.
However, the trade group Financial Services Association of America that is the representative for the industry of more than $39 billion, says the new rule would devastate the industry that currently services between 30 million and 40 million customers annually.
The executive director of the group said that taking away access to loans means a large number of Americans would be left without a choice to turn to, and would have to seek out an unregulated loan industry, overseas as well as elsewhere, while at the same time others would simply write bad checks and suffer under more pressure from additional debt.
It is estimated by the CFPB that the loan volume for this industry could be reduced by 50% and many of the payday loan stores that are 16,000 strong across 35 states would be forced to close.