TLDR: The U.S. consumer financial watchdog this week outlined its plans for cracking down on the payday lending industry and ensuring that borrowers can repay their loans.
Although credit markets have improved substantially since the financial crisis, many Americans still have a hard time finding a loan. As a result, growth in alternative lending has surged in recent years. While it’s good that consumers now have more places to turn to for credit, some of the more popular new options can wind up putting borrowers in financially hazardous situations. Consider payday loans, the relatively small-dollar extensions of credit that usually have to be paid back in a very short period of time. To ensure this, payday lenders, as the name implies, usually require that payments are automatically deducted from the borrower’s paychecks. There are many other credit products with similar structures and they all typically come with sky-high interest rates attached and guaranteed forfeitures should a borrower become delinquent. The U.S. Consumer Financial Protection Bureau this week unveiled a framework for providing more safeguards to consumers engaging in such lending practices, arguing that creditors currently focus too much on their ability to collect rather than a borrower’s ability to repay. While the CFPB likely means well, some worry that more regulations could limit the credit options available to many Americans, particularly small business owners and aspiring entrepreneurs. Reuters continues with more on the CFPB proposal, “”The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans,” CFPB Director Richard Cordray said in a statement. The framework gives lenders two compliance options. They could verify prospective borrowers’ income and debt history to guarantee they can repay loans, or they could offer cheap repayment options and limit how many loans people may take out. The requirements are tailored so that slightly different rules apply to short-term loans, which must be repaid within 45 days, versus those stretching longer. Even before the framework was released, lenders warned the consumer bureau to take care not to disrupt access to credit or hurt small businesses. “Consumers thrive when they have more choices, not fewer, and any new regulations must keep this in mind,” the Community Financial Services Association of America, which represents short-term lenders, said in a statement on Wednesday. Lawmakers created the CFPB as part of the 2010 Dodd-Frank financial oversight law. A CFPB spokesman said a formal proposal could come later this year. A comment period for the public and the industry would follow, after which the rules could be finalized…”
