Payday lenders are facing new federal regulations aimed at preventing low-income borrowers from being buried by high fees and rising debt loads.
The Consumer Financial Protection Bureau will unveil a set of proposed rules on Thursday. President Barack Obama is also expected to use an afternoon speech in Birmingham, Alabama, to address the plans to oversee the payday sector and efforts by congressional Republicans to limit the bureau's authority.
Borrowers barely getting by on low paychecks have increasingly relied on storefront and online lenders, prompting the federal government to set standards for a multibillion dollar industry that has historically been regulated at the state level.
The loans' steadily compounded fees have overwhelmed some borrowers, causing them to lose their bank accounts and their cars — and even risk prison time. The regulations are designed to ensure that debts can be repaid, instead of plunging borrowers into worse circumstances.
"Extending credit to people in a way that sets them up to fail and ensnares considerable numbers of them in extended debt traps, is simply not responsible lending," CFPB director Richard Cordray said in remarks prepared for a hearing Thursday in Richmond, Virginia.
The proposed rules would apply to payday loans, vehicle title loans — in which a car is used as collateral — and other forms of high-cost lending.
Before extending a loan due within 45 days, lenders would need to ensure that consumers can repay the entire debt on schedule. Incomes, borrowing history and other financial obligations would need to be checked in order to show that borrowers are unlikely to default or roll over the loan.
In general, there would be a 60-day "cooling off period" between loans and lenders would need to provide "affordable repayment options." Loans could not exceed $500, have multiple finance charges or require a car as collateral.
The CFPB outlined a similar set of proposed rules to regulate longer-term, high-cost loans with payback terms ranging between 45 days and six months. These proposed rules also include the possibility of either capping interest rates or repayments as a share of income.
The rules — which are meant to ensure successful repayment — will be reviewed by a panel of small business representatives and other stakeholders, before the bureau formalizes the proposal for written public comments and sets final regulations.
The payday loan industry warns that overly strict regulations could cut into the flow of credit for the Americans who need it most, saying that the CFPB should continue to research the sector before setting additional rules.
"The bureau is looking at things through the lens of one-size fits all," said Dennis Shaul, chief executive of the Community Financial Services Association of America.
But that lens also reveals some troubling pictures.
Wynette Pleas of Oakland, California, says she endured a nightmare after taking out a payday loan in late 2012.
The 44-year-old mother of three, including a blind son, borrowed $255 to buy groceries and pay the electricity bill.
But filling in part-time as nursing assistant, her hours were few and far between. Pleas told the lender she would be unable to meet the loan's two-week deadline. Still, the lender tried to withdraw the repayment straight out of her bank account even though she lacked the funds. This caused Pleas to be hit with a $35 overdraft fee and a bounced check.
After this happened six times, Pleas said the bank closed her account.
Collection agencies started to phone Pleas and her family. About six months ago, she learned that the $255 loan had ballooned to a debt of $8,400 and the possibility of prison.
"It's not even worth it," said Pleas, who is now rebuilding her finances and life.
The proposed regulations come after a 2013 CFPB analysis of payday lending. For an average $392 loan that lasts slightly more than two weeks, borrowers were paying in fees the equivalent of a 339 percent annual interest rate, according to the report. The median borrower earned less than $23,000 — beneath the poverty line for a family of four — and 80 percent of the loans were rolled over or renewed, causing the fees to further build. Over the course of 12 months, nearly half of all payday borrowers had more than 10 transactions, meaning they either rolled over existing loans or borrowed again.
"They end up trapping people in longer-term debt," said Gary Kalman, executive vice president at the nonprofit Center for Responsible Lending.
Several states have attempted to curb payday lending. Washington and Delaware limit how many loans a borrower can take out each year, while Arizona and Montana have capped the annual interest rates, according to a 2013 report by the Center for Responsible Lending.
Industry representatives said states are better set up to regulate the industry, ensuring that consumers can be protected while lenders can also experiment with new loan products.
"We believe the states are doing a good job regulating the industry," said Ed D'Alessio, executive director at the Financial Service Centers of America. "They've got a longer experience. They come at it with a standard where the laws governing the industry have made it through the legislative process."
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