CFPB Proposes New Regulations on Payday Loans

In an attempt to avoid situations in which borrowers get stuck in an endless cycle of debt, the Consumer Financial Protection Bureau (CFPB) released a set of new proposals this Thursday to regulate the market for payday loans and certain types of credit known as being "debt traps." James Rufus Koren, in his L.A. Times article, discusses the new rules and the effects they may have on the economy.

A payday loan is a special type of loan with very high interest rates that is made on the condition that the borrower will pay it back as soon as they receive their paycheck. Unfortunately, according to CFPB Director Richard Cordray, lenders often make the loans knowing that borrowers can't pay them back and will end up stuck in a never-ending cycle of debt. The new rules aim to limit the number of loans a consumer can take out in a year and make the lenders review the finances of potential borrowers much more thoroughly before making a loan. In a healthy credit market, lending and borrowing money should be a win-win situation. Both parties, not just the lender, should benefit from the transaction, and that is the situation the CFPB is trying to remedy.

Lenders have been outraged by the proposed changes, claiming that it will make their business more costly and will cause most of their loans to become unprofitable. The CFPB has responded that it isn't looking to put lenders out of business. Rather, the organization is trying to make sure that customers don't get stuck in debt traps, where they pay off a loan just to find out that they need to take out another loan to have enough money for day-to-day living costs. The new regulations will force the lenders to do in-depth analysis on income and living expenses to determine whether they will be able to make the payments every month without running out of money.

Already, the CFPB has enacted similar regulations for banks and mortgage lenders, but payday lenders may be right in complaining that the new rules are unfair or insensible. Many claim that the process will add time and cost, which hurts everyone. Under current practice, a borrower can walk into a loan branch and leave 20 minutes later with a $250 loan. A detailed analysis of "take-home pay" and expenditures would probably add a lot of cost in the form of fees, which could drive away potential borrowers. Those borrowers could end up going elsewhere to find their loans.

It is likely that the new regulations will naturally stop some people from getting loans. Some people worry about where those people will have to turn to make ends meet. Perhaps some will be forced to get a handle on their finances and will end up much better off in the long-run. Others will have to go to pawn shops or family members for help. Still others may turn to installment lenders, which are not covered under the new rules. The installment lender gives much larger sums of money, with smaller monthly payments over a long period of time, but the borrowers often end up paying more in interest on the loan than the actual value of the loan itself. Analysts believe that the regulations will help somewhat, but only in that they will stretch the debts out onto a longer time line, rather than reducing such debts altogether.

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