The payday loan industry as we know it will be going through some major changes. The federal government created Consumer Financial Protection Bureau (CFPB) has proposed, and will be implementing, a series of rules and regulations that will completely change the way the industry operates. The new rules will go into place during July 2019.
While anything can happen between now and then, the fact is that the CFPB is one of the most independent agencies within the federal government. Congress, the President, and other officials have little power (if any) to influence or change its decisions. With that being said, as we all know, July 2019 is a long way off, and anything can change between now and then in the payday lending industry as well as with these proposed rules.
New proposed Consumer Financial Protection Bureau rules
There are 4 major changes that will take effect. Some of them are similar to what the United Kingdom did several years ago, and find more details on payday as well as personal loans in the UK. Once again these changes will only go into effect if there are no lawsuits, negotiated settlements between the CFPB and the Community Financial Services Association (which represents payday lenders) or some type of government intervention. The 4 key components of the new regulations are as follows:
The first major change is that potential borrowers need to be “vetted” or screened. What a novel idea! This means a payday lender actually needs to look at the applicant’s income, budget, credit scores, and more. At the conclusion of that review process, it needs to be determined that the applicant will have a some type of solid ability to repay the personal loan. Note this will only apply to anyone who wants to borrow more than $500; smaller dollar amounts will not be as closely regulated.
There will also be rules placed on the payday loans themselves. There will be a few major changes here, but they have to do with limits to (1) the number of loans and (2) repayment requirements. The goal is to try to prevent a cycle of financial hardship and borrowers falling into a so called “trap” of ever increasing debt.
As of July 2019, the Consumer Financial Protection Bureau will limit a family to taking on no more than 3 loans in succession, and they can also only have one loan outstanding at a time. These are the final changes, and they are major. They are focused on preventing a cycle of borrowing money from high priced lenders.
Another significant change has to do with fees. Everyone hates overdraft charges from banks due to insufficient funds in an account, as those costs quickly add up. The new CFPB rules limit the number of times a payday lender can try to withdraw any fees.
If the borrower does not have the funds, then the company can’t try to withdraw money more than 2 times. If both attempts are unsuccessful, then the payday lending company needs to reach out to the borrower to determine what the next steps are. This will in effect cap the amount of fees that a household can be hit with.
As noted, it is currently expected that these changes will go into effect July 2019. As with any government regulation, these proposed changes are probably bound to change as the Consumer Financial Protection Bureau will probably work with lenders, the courts, and public to tweak them. But the bottom line is that no matter what results from this, there will definitely be more consumer protections put into place by the CFPB.