What's happening using the payday lending rule? Here's your rundown
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The Consumer Financial Protection Bureau was established under the Federal government to “protect consumers from unfair, deceptive, or abusive practices,” based on its mission. As part of this effort, the company issued a new payday lending rule in 2022 to regulate high-cost, short-term loans that customers can get from certain lenders.
The rule had been slated to go into effect in August this season. However in February, under its new director, Kathy Kraninger, the CFPB proposed changes towards the rule, including …
- Delaying the effective date of the rule until November 2022
- Removing a major provision that would require lenders to find out whether individuals have the opportunity to repay their loans based on the loan terms before giving them the money
The controversy? The CFPB says the payday lending rule as-is will stop use of a borrowing option that a lot of people rely on. Others argue the CFPB's proposed changes have been in direct conflict with its mission.
Want to understand more?
- What may be the payday lending rule?
- Why performs this matter?
- What's next?
What is the payday lending rule?
The idea behind the rule – informally referred to as payday lending rule – would be to protect consumers from the financial risks of payday loans. Pay day loans, along with car title loans and other high-cost quick installment loans, typically come with steep fees and other terms which will make it tough to settle even small quantities of debt – often triggering a devastating cycle of high-cost borrowing. A typical payday loan lasting two weeks costs $15 in fees for every $100 borrowed, according to the CFPB's own research. That equates to a yearly rate of interest nearing 400%.
One of the payday lending rule's key provisions – known as the ability-to-repay provision – would require payday and auto title and certain other lenders to evaluate people's ability to repay before issuing them loans.
Why performs this matter?
Supporters of the ability-to-repay provision say it is necessary to rein within an epidemic of individuals taking out payday loans and repeatedly rolling over their loan repayments, burying themselves in debt.
But the CFPB says the ability-to-repay provision would sharply restrict being able to issue loans, effectively killing the payday lending industry and eliminating a much-relied-on borrowing choice for consumers.
Consumer advocates are worried that the CFPB's proposal to strike the ability-to-repay requirement is a sign the agency is backing from its mission of protecting Americans from unfair financial practices and regulating financial products like student loans and pay day loans. With Kraninger as its new director, critics say the agency has been undergoing a shift toward more conservative rule-making and enforcement.
What's next?
The CFPB made its proposal to drop certain provisions from the rule in February. The required public comment period ends May 15 right before midnight – then the agency can proceed with finalizing its changes towards the payday lending rule.
If you'd like to learn more about the proposed changes and comment prior to the deadline next month, you can go to this site and click on the “Comment Now” button in the top-righthand side of the page.