Dave Kovaleski
Sen. Martin Heinrich (D-NM), ranking member of the Joint Economic Committee, praised the Consumer Financial Protection Bureau’s (CFPB) final rule to establish borrower safeguards on payday loans.
“For far too long, the payday loan lenders—who have more branches nationwide than Starbucks—operated with little oversight, depleting consumers’ bank accounts along the way,” Heinrich said. “New consumer protections take commonsense steps to prevent predatory lenders from targeting vulnerable working Americans.”
Payday loans, also called small-dollar loans, provide quick access to cash in exchange for full payment plus variable interest rates, typically within two to four weeks after the loan was provided. Payments are guaranteed through a prewritten personal check or an automatic withdrawal from a bank account. Many borrowers use payday loans as a quick fix when ordinary living expenses get too high—the average payday loan borrower makes about $30,000 a year with a credit score in the low 500s. More than 19 million households use payday loans.
While payment arrangements like these might seem like a reasonable solution to some, the underlying rates and conditions can be high, Heinrich said.
“These extreme interest rates and harsh fee structures on small-dollar loans can balloon into payments that exceed the amount of the initial loan and kick borrowers into dangerous, ongoing debt traps of loan rollovers,” he said. “On an average small-dollar loan of $375, borrowers can easily pay $520 in fees and be indebted for five months out of the year. Moreover, more than 80 percent of payday loans are rolled over or renewed within 14 days.”
The new CFPB rule says lenders will be restricted from making loans that borrowers are unable to pay back with accrued interest. The rule also attempts to break the debt trap cycle by limiting the number of consecutive loans that can be taken, and requiring longer repayment timelines, making repayment of loans more manageable.
“Unfortunately, for far too long these lenders have determined the rules of the game, charging borrowers exorbitant fees and interest rates,” Heinrich said. “The CFPB’s action protects consumers from these predatory lending practices while preserving small-dollar loans as an important source of credit for working families.”
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