The Consumer Financial Protection Bureau has issued a new legislation that requires payday loan companies that charge interest rates as high as 390% to verify the borrowers’ abilities to make repayment prior to approving the loan.
Payday loans lenders are required to take a look at a number of factors when determining the ability of the borrower to repay the loan including income, payment history as well as the financial commitments that they currently have. The rules are available for the public to give their opinions and feedback until the 14th of September. The comment period will be used to push the changes proposed in the CFPB.
Bill Himpler, the vice president executive of the American Financial Services Association said that it will affect at least 30% of the population in the USA to get access to credit. There are a number of business officials that claimed they only get a small percentage of complaints even though many people argued that payday loans is a predatory lending.
If the legislation is approved, it will prevent lenders from automatically adding fees to the bank account of the borrowers. The legislation has someone influential as endorser. President Barack Obama, who supports the new legislation, said that lenders should have the practices of always checking the borrowers’ financial history and ensure they can afford to pay back before offering the loans.
Many online lenders do not like the proposed rules. They defended payday loan by saying that it will offer protection for borrowers are in need of emergency cash. Some have also threatened to file a lawsuit against the government for launching the legislation. Many payday loan lenders claim that it will have negative impact on their industry and it would cause them to be out of business.
The lenders told the press that the majority of their customers have no problem paying back the loans on time. According to them, they have borrowers from various types of financial backgrounds including doctor, teachers and cops. Most of the borrowers are from middle class and they must have jobs in order to apply for the payday loans.
Online payday loan lenders argued that the newly proposed regulation will result in an increase of cost in their small business. The increase in cost can force them to close down their payday loan business. With lesser payday loan shops around, people will start looking for unregulated alternatives like loan sharks who will charge even higher interest rates since they can’t borrow money from the banks.
The Consumer Financial Protection bureau is currently also doing some investigations on the tactics that the lenders use to repossess the property of the borrowers when they fail to pay on time.