What You Need to Know about the New Payday Loan Rules

On June 2, 2016, the Consumer Financial Protection Bureau issued proposed rules to regulate the payday loan industry. These rules close the traps that many low-income residents find themselves in when money runs short. Here’s what you need to know about the new payday loan rules, and why they are necessary.

The payday loan industry is built around predatory lending strategies designed to take advantage of low-income families. Many borrowers find themselves locked into cycles of debt they cannot escape. Using short-term loans, often payable on a person’s next payday, they exact astronomically high interest rates and call it the cost of doing business. A recent Pew Trusts survey reveals that in Michigan, borrowing $300 for 5 months through a payday lender will cost you $425. That’s a 369% annual interest rate.

That’s why the Consumer Financial Protection Bureau (CFPB) has set out new proposed rules that require short-term lenders to comply with regulations similar to other lenders like banks and credit unions, limiting their ability to issue impossible loans.

The Payday Loan Full-Payment Test

Under the CFPB regulations, lenders must determine whether a loan is affordable before cutting the check. That means the borrower must have the income to meet financial obligations while still paying for basic living expenses. Lenders must run a credit report to identify outstanding loans and payment obligations. If the payment structure requires balloon payments or a single payoff, the lender will have to confirm that the borrower will be able to afford his or her debts as they come due, and for 30 days after the largest payment.

Principal Payoff Options

Borrowers won’t have to meet the Full-Payment Test if they instead take the Principal Payoff Option. Available on loans up to $500, this option is designed to allow borrowers to pay off the principal in 2 extensions, rather than simply compounding interest. This option is only available in lower-risk situations where there are no other recent short-term or balloon payment loans.

Limits on Reborrowing

The CFPB payday loan regulations would also make it harder for lenders to pressure borrowers into reborrowing or refinancing the same debt. They place limits on loans made within 30 days of one another, requiring borrowers to prove their financial situation had improved before taking a second or third loan. After that, the regulations impose a mandatory 30-day cooling off period. Similar limits are placed on refinancing high-cost installment loans or auto title loans.

When consumers fall behind, it is essential that they be given a way to escape the cycle of predatory lending. The CFPB’s regulations are designed to loosen the hold payday lenders have on their borrowers, and given them a way out of debt.

Dani K. Liblang is a collection harassment attorney at The Liblang Law Firm, PC, in Birmingham, Michigan. She defends consumers against predatory collections companies. If you need help resolving your debt, contact the Liblang Law Firm today for a free consultation.