In early June the Consumer Financial Protection Bureau (CFPB) announced its proposed rule for regulating the payday lending industry—and what it calls “debt traps” in particular. According to the bureau, one in five consumers default on payday loans due to the fees and penalties that accrue when the loans are rolled over. Often, payday loans have annual percentage interest rates of 390 percent. Until now state regulations have found mixed success in preventing the industry’s worst behaviors (here’s an example of New York regulators cracking down on payday lending abuse). Some have evaded regulation by switching to auto-title loans, and in states that have banned payday loans outright, lenders simply lend from out of state.
The CFPB’s rule is the result of a process that began more than a year earlier. The rule’s critics allege it will cripple the industry, which consumer advocates believe thrives on debtors who ultimately can’t afford to repay the loans. The question is whether it will reduce New York bankruptcy filings. Hopefully the answer will be yes, but before explaining why here’s an explanation of the rule.
As with many proposed regulations, e.g. the gainful employment rule for proprietary colleges and universities, the CFPB’s proposed rule is quite complicated, containing a handful of tests depending on debtors’ circumstances and the types of loans involved. Lenders will need to pass the “full-payment test,” which addresses both loan affordability and justifications for successive loans. The CFPB will consider payday loans affordable when potential borrowers have sufficient incomes to repay the loans and can meet basic living expenses. Lenders would not be able to justify rolling over loans to debtors under the same terms as the prior loans unless the debtors’ financial circumstances materially improved in the interim. After three loans debtors would receive a mandatory cooling off period of 30 days in which they could obtain no new payday loans.
For shorter-term and lower-risk payday loans, debtors’ circumstances would not need to meet the “full-payment test,” and instead they would be allowed to borrow up to $500 so long as the payday loan is paid down in full on time or if it’s paid down within two extensions with some principal paid down at each extension point. The rule would also reduce penalty fees created by debtors’ primary banking institutions due to debit failures and bank overdrafts.
It’s possible the proposed rule would reduce bankruptcies because so many consumers’ financial circumstances fail the rule’s tests. Debtors who don’t qualify for payday loans won’t get locked in “debt traps,” but it’s conceivable that the cooling off period will deny consumers a loan they need to stay afloat. However, by the time consumers are deciding to use payday loans, it may be too late to avoid a financial disaster anyway. Many consumers who live paycheck to paycheck need alternatives to payday loans when times get rough, cooling off period or no.
For more information on the CFPB’s rule, click here or here (pdf).
If you’ve accumulated significant debt, whether due to payday loans or just credit card debt, 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 bankruptcy attorney near me Bruce Weiner for a free initial consultation.
