A federal consumer watchdog pledged to end financial abuse coming from the payday loan industry.
The Consumer Financial Protection Bureau pledged this week to come with a set of new rules that will stymie the growing business of payday borrowing in the U.S. The agency noted that the practice has staggering rates which often leaves borrowers struggling with a never-ending spiral of debt.
It is the first time the Obama administration steps in and places some restrictions on the high profit-yielding business. Still, the new rules will have to undergo a lengthy review process before they morph into a new law.
But the federal government believes that the regulation could shrink a flourishing industry that provides last-minute money to desperate borrowers. Lenders are concerned that under the new rules fewer people will agree to do business with them.
On the other hand, consumer advocacy groups hailed the new rules. They believe that consumers will now have the option to look for safer alternatives that don’t involve paying a three-digit APR.
The CFPB also plans to prevent people from falling into the so called “long term debt traps.” Under the new rules, borrowers will be entitled to a pause after three consecutive payday loans. The fees of these loans are so burdening that you may end up paying $1,000 for an original loan of $350.
Even though the idea of resorting to three consecutive payday loans may seem exaggerated, experts say that some customers borrow money more than thrice. For instance, there are people who need money to cover an unexpected expense such as a hospitalization. But the following months they will need more loans to handle other expenses as their lender shrinks their income through debt and fees.
About 45 percent of borrowers resort to payday borrowing more than four times in a row while 15 percent take out more than 10 consecutive loans. Richard Cordray, head of the CFPB, likened the situation with ending up in a cross-country ride with a taxi although your initial thought was just to get a ride across town.
The agency pledged that the new rules will prevent lenders from forcing customers into similar debt traps. So far, payday lending industry has found gaps in state legislation to set up customers to fail. Yet, the industry now complains that the new federal rules are excessive and do not benefit customers as intended.
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