New York bankruptcy is much safer than taking out a payday loan to get by, but that doesn’t stop people from using them. Some regulators have taken efforts to curb the worst practices, as New York State is doing, but now it appears the federal government is getting involved. Specifically, the Consumer Financial Protection Bureau (CFPB) announced on March 26 that it would consider issuing rules to control payday “debt traps.”
The CFPB plans to convene a small business review panel to obtain feedback from small lenders. Yes, they get a say in the process too because the bureau believes that the public does need (or can’t prevent) payday loans. The CFPB intends to split its rules to deal with short-term and long-term loans. The rules would in turn offer two alternatives for small lenders, “prevention” or “protection,” for keeping consumers from falling too deep into debt.
For short-term loans, to prevent debtors from becoming overburdened debtors lenders would need to determine that debtors have the ability to repay the loans as they come due, and they would not be able to issue new loans to the same debtors for a 60-day period after the previous one is repaid. The other set of rules would protect debtors by limiting rollovers to two per loan, capping debts to $500, and banning more than one finance charge.
The CFPB defines longer-term loans as those that last more than 45 days, grant the lender access to the debtor’s bank account or vehicle, and carry an interest rate of greater than 36 percent. The first set of rules would prevent debtors from falling behind using many of the same mechanisms that would apply to short-term loans, notably, requiring the lender to verify that the debtor can repay the loan. Borrowers would not be able to refinance unless their lenders determine that their financial conditions improved. For protecting debtors, the bureau is deciding between two alternatives, one that requires a maximum interest rate of 28 percent and another that would cap debtors’ repayments at no more than 5 percent of their monthly incomes.
The CFPB is also interested in requiring borrower notification before taking money from their bank accounts and curbing excessive deposit account fees from unsuccessful withdrawal attempts.
The CFPB’s announcement can be found here.
The proposed set of rules, while cumbersome, will hopefully protect debtors better than the current system does. One concern is that they might not prevent the most unscrupulous of lenders from taking advantage of people, but that’s always a problem in regulating lending behaviors. One thing that won’t change: Bankruptcy is available for debtors with too much payday loan debt.
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 adversary proceedings Bruce Weiner for a free initial consultation.
