Payday lenders won’t have to check if borrowers can afford loans

Payday lenders won’t have to check whether borrowers can afford to repay their high-interest loans under a new rule from the Consumer Financial Protection Bureau. Its director, Kathleen L. Kraninger, mentionned the new provision will provide “access to credit from a competitive market”.

The rule reflects a reversal of a 2017 provision devised by the Obama administration and designed to prevent consumers from taking on expensive payday loans, which can carry interest rates as high as 400%. In comparison, credit cards offer rates between 12% and 30%. With the new rule, lenders will no longer be required to determine “reasonably” whether a consumer can repay the loan on a timely basis.

Some lawmakers have hailed the new rule as a benefit to consumers, with Republican Patrick McHenry of North Carolina saying it will help “families in need have access to all options to cover unforeseen costs.”

But consumer advocates have said it could hurt some consumers, especially people of color, who have less access than white households to traditional loan services and who are used to exploiting what are supposed to be loans. Short term payday loans charging higher rates. This could be doubly damaging during the current recession and the economic strains that many households are experiencing during the pandemic, they added.

“In a time of unprecedented financial challenges, the CFPB has canceled much needed but insufficient consumer protections, making it easier for payday lenders to trap Americans in a devastating cycle of debt,” Rachel Gittleman, Financial Services Outreach Manager with the Consumers Federation of America, said in a statement.

The legal pitfalls of payday loans


She added: “The ‘repayment capacity standard’ was an important and modest step in ensuring that Americans could afford to repay the loan with exorbitant interest rates imposed by payday lenders.”

New rule “gives green light to predatory payday loans in the middle [the] COVID-19 pandemic, “US consumer organization PIRG said in a statement.

“At risk”

The Obama-era rule that required lenders to determine a borrower’s ability to repay had prompted many payday lenders to shift gears and offer installment plans, according to the Pew Charitable Trusts. Instead of requiring full repayment within days or weeks of clearing the next paycheck, installment loans provide more flexibility and can save borrowers money on interest.

“The 2017 rule held back small loans with skyrocketing payments and encouraged traditional lenders to offer affordable installment loans,” said Alex Horowitz, senior researcher for the Pew Consumer Credit Project, in a statement. “Today’s action puts all of that at risk.”

Black Americans are twice as likely as other races to take out payday loans, Pew study finds find. Renters, households earning less than $ 40,000 per year, people without a university degree, and separated or divorced households are other groups that are more likely to rely on these expensive loans.

Instead of turning to payday loans to make ends meet, consumers should instead seek out credit unions, which can provide loans at lower interest rates than commercial lenders, or even ask for help. to their friends and family, said Mike Litt, director of the US PIRG’s consumer campaign.

“Contact every business or person you owe money to and explain that you need help because of the coronavirus,” Litt said. “It could help you delay or reduce your monthly payments, or avoid interest and late fees.”

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