The CFPB, created after the 2008 financial crisis, is an independent agency tasked with protecting consumers in the financial sector. Along with banks and credit unions, payday lenders fall within the agency’s jurisdiction. However, as originally reported in February, the payday loan industry has mostly been subject to individual state law.
In March 2014, the CFPB released a startling report on the realities of payday loans and the effect they have on low-income households and borrowers, the demographic payday lenders target most. If a borrower is not in a position to pay back the loan after the initial 14-day term or after one renewal, added fees and exorbitant interest rates make it difficult to get out from under the debt.
“The CFPB, in its plan, suggests that payday lenders from the outset should determine whether borrowers have the ability to repay without defaulting or re-borrowing. That notion takes aim at a pillar of the payday business model, because lenders have long made profits from a far more desperate scenario, where borrowers take out new loans, often many times over, to pay back the initial loans and their fees. Borrowers could in some circumstances still roll over loans, but not ad infinitum; after three loans there would be a 60-day cooling off period.
Still, some consumer advocates say the CFPB plan doesn’t go far enough. Under the CFPB proposal, lenders can avoid vetting their borrowers if they instead apply a series of additional safety nets to the loan. Either the principal must decrease with each loan, or lenders must provide what the CFPB calls an “off-ramp” after the third loan, where borrowers can pay back what they owe without accumulating further fees.
In a typical payday loan, available both in storefronts and online, a consumer must provide either a personal check to the lender or authorize access to his bank account for the collection of the principal and fees. At that point, said Richard Cordray, the CFPB director, lenders gain a “stranglehold” over borrowers’ funds, potentially draining their accounts and forcing them to choose between ‘repaying the loan and paying rent or covering food or medicine or other pressing needs.'”- The Washington Post, March 26, 2015