Payday loans are often very dangerous to consumers because their high interest rates make it easy for debtors to fall behind on their payments. Naturally, New York bankruptcy cases often include payday loans. Consequently, a few years ago the Consumer Financial Protection Bureau (CFPB) began drafting a rule that would regulate payday lenders while not driving them out of business entirely. In early October, the CFPB finalized the rule, hoping it would stop “debt traps” that would force people into bankruptcy. I’ll highlight some of its main points.
In general the rule appears broader than when it was first taking shape last year. It still showcases a “full-payment” test that requires lenders to determine that debtors have the ability to pay the loans they take out. Specifically, debtors must be able to afford their payday loans while still being able to meet their other obligations while maintaining basic living expenses. For a payday loan that’s fully due in one payment, borrowers must be able to pay within two weeks or one month. The rule limits the number of loans borrowers can take out in succession to three.
The rule regulates short-term and lower-risk loans differently if they are under $500 and can be repaid over a longer term, which the CFPB refers to as the “principal-payoff option.” Such loans do not need to meet the full-payment test, and borrowers can either pay their loans off in full or take up to two extensions so long as they pay off one-third of the principal with each payment. These loans are also restricted to borrowers who currently owe no other payday loans to prevent debt traps.
One way the rule appears broader than last year is that it protects smaller financial institutions (community banks and credit unions). Lenders that make fewer than 2,500 short-term loans per year and derive less than 10 percent of their revenue from such loans are exempt from the “full-payment” test and the “principal-payoff option.”
Finally, the rule prevents lenders from debiting a borrower’s account after two successive unauthorized attempts, and it requires them to seek the borrower’s authorization to access his or her account again. The goal is to ensure that debtors can dispute lenders’ attempts to debit their accounts if the lenders did so erroneously.
The CFPB’s press release on its rule can be found here.
Looking at its mechanics, it appears the CFPB’s rule will curb the worst abuses and outcomes from the payday-lending industry. It will also hopefully reduce needless defaults and bankruptcies. In the meantime, if you are struggling with debt, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
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