Something that has been preventing borrowers from closing their loans without excessive fees is the recurring cycle that the debt gives them. New regulations have been made today to improve this situation. This covers loans on car-title, deposit products and loans that are open-ended and have high installments.
Traps set for consumers
The few options left for consumers are reborrowing, defaulting, skipping on other difficult obligations which are necessary for survival like rent and other food expenses and medical expenses. The CFPB has delivered a video on the working of payday loans:
The rate of loans, exceeding 300%
This could eventually lead to penalty fees being increased or taking custody of cars. These payday loans which are due on the day of the borrower’s payday, which comes under 2 weeks comes at the annual percentage of about 390%. Loans on car-title are to be paid within 30 days with a 300 % rate. Since the borrower is mostly not able to cover this amount, he is forced to reborrow. There are certain proposals by the CFPB which include:
- Having a full-payment test:Lenders must be held responsible for conducting background checks on whether a borrower will be able to close the amount for each payment, and still live a normal life with all the living expenses covered. This includes the borrower not being pushed to reborrow in the next one month.
- The principal payoff for loans that are short-term:Without having to go through the full payment test, consumers should be able to borrow up to $500. This is for short-term loans to prevent the borrowers from being stuck in a never-ending cycle of debts. This should not be offered to customers with outstanding payments for more than 90 days. Car-titles should also not be taken as collateral. An extension limit of 2 is implied, but on the condition that the borrower pays a minimum of one-third of the principal.
- Options for long-term lending:Lenders will be allowed to give 2 longer-term loans, that have more flexibility. These have to meet certain parameters set by the Administration, which means interest rates are capped to a value of 28%. The application fee should also not exceed $20. The alternate option is to offer loans that can be paid in equal payments that do not exceed the 2 year period, with a maximum cost of 36%, which includes all but the origination fee.
- Cutoff on debit:Payday lenders should be made to provide consumers with a written notice. This should be issued before the attempt on debit of the account of the consumer to collect the payment that is due. Only after 2 attempts that are unsuccessful, the lender will be barred from the debiting process.
The newly introduced rule that will negatively affect customers
These new rules proposed by the CFPB will prove to be a blow to the customers and it cuts off all access to the credit feature for many Americans who still use loans of small value to manage a temporary shortfall in their budget and other expenses. This was mentioned by Dennis Shaul, who works in the field of the American financial services. The association for paydays has said that the new rule will eradicate 84% of the loan volume and another statistic that shows that 46% of the Americans cannot actually pay for an unprecedented expense of about $400 and would have to sell some other item or reborrow. The problem lies in where consumers should look for credit needs without regulated lenders. The agency will accept opinions and comments on this issue only till the 14th of September before the regulations are finalized