Pay Day Loans Face Bruising Fight Over the Industry’s Future
New U.S. regulations are on the way, and they’re ones that could put a serious dent in the profits of the pay day loan industry. Any day now, the Consumer Financial Protection Bureau, or CFPB, is expected to propose a set of official rules that will put the payday loan industry in check. Lobbyists as well as numerous republican lawmakers are on the side of the payday loan industry while others have the CFPB’s back, which means that the lenders of pay day loans now face a bruising fight over the industry’s future.
Payday Loan Lenders Fight to Stay in Business
The $6 billion short-term loan industry is gearing up for regulation changes following the conclusion of a final review by several of the country’s regulatory agencies. According to Reuters1, a lawsuit is being considered. Dennis Shaul, the chief executive for the Community Financial Services Association of America, or CFSA, which is a payday advance loans lending group, said, “We are likely, on our part, to take appropriate actions to see that this rule never becomes effective and that includes a possible lawsuit.”
Industry insiders believe that the CFPB’s new rules will devastate too much of the established industry. If the regulations do so successfully, then this could harm consumers because poor and rural borrowers will be forced to use the services offered by illegal loan sharks.
An Agency that Failed to Listen
The CFSA maintains that the process used to draft the new regulations against its industry was flawed because the agency failed to listen to borrowers about their needs. Along with this, the CFPB did not handle the comment letters it received properly. If a lawsuit is brought against the agency, the industry could use these reasons to get the court to force the CFPB to rescind its regulations.
Despite the legal threat, the CFPB has declined to comment about how it made its regulation decisions regarding pay day loans nor has it commented on its final decision. But, based on public records, the agency followed the law during the rule changing process.
With Trump in the White House, the Republican Party states that it intends to negate the CFPB’s regulations through legislation. According to republicans, they want the law nullified because it’s too restrictive and likely to harm everyday people more than it will assist them since pay day loans will no longer be a borrowing option.
Saving Pay Day Loans by Blocking Regulatory Action
Pay day loans could be saved if republicans get enough votes together to block the CFPB’s regulatory action. Pymts.com2 reports that to block regulations against payday advance loans, House of Representative Republicans have included an amendment in the spending bill, one that prohibits the agency from enacting regulations against the lenders of paycheck loans.
If republicans fail to pass the spending bill with the amendment, and political experts believe that they will fail, then republican legislators have a backup plan to repeal the regulation, keeping pay day loans a borrowing option across the country. Their plan includes using the Congressional Review Act. This will prevent the CFPB from ever composing a comparable regulation that would affect payday loan lenders.
While this could be effective, the plan comes with its fair share of risks. For one thing, the country is heading into an election year. States that are opposed to government interference may happily accept no regulation against pay day loans, but moderate ones may not be as accepting. In fact, citizens in these states are likely to accuse politicians of supporting debt traps, which could easily tank a bid for reelection.
When Financial Emergencies Become Long-Term Loans
Consumers take out paycheck loans when financial emergencies arise. The intention is always to repay the loan by the next payday. However, these paycheck loans often feature terms that include interest rates that are as high as 390 percent, and when they do, short-term pay day loans become long-term ones, like 100 day loans. This happens because borrowers continue to take out payday advance loans to repay earlier ones, creating a cycle of debt, a cycle that’s incredibly hard to break.
The CFPB’s set of rules are meant to stop people from getting into this debt cycle. These regulations include requiring lenders to make sure that a consumer can afford to repay a loan and limiting the number of pay day loans that a borrower can take out.
Should Congress Approve the Protecting Consumers from Unreasonable Credit Rates Act?
CUInsight3 reports that consumer supporters across the nation have worked diligently to gain stronger regulations at the state and federal level. They have done so to temper the payday advance loans industry. The Center for Responsible Lending and Americans for Financial Reform in addition to almost 40 national and state organizations recently issued a letter to Congress asking it to approve the Protecting Consumers from Unreasonable Credit Rates Act. The Center for Responsible Lending’s goal is to make sure that every responsible borrower has access to a fair and inclusive financial marketplace, one that offers opportunities and assistance.
U.S. Senators Richard Durbin and Jeff Merkley along with U.S. Representatives Steve Cohen and Matt Cartwright wrote the Protecting Consumers from Unreasonable Credit Rates Act to protect consumers by capping interest rates for pay day loans and other kinds of financial products at no more than 36 percent annually. The group wrote, “Currently, payday and car title lenders charge triple digit annual interest rates, often 300 percent or higher.”
A recent poll confirms that the public is interested in seeing payday advance loans more heavily regulated. While the CFPB is able to make rules that impact the payday lending industry, only Congress has the power to cap interest rates.
There are Many Ways to Help Consumers
The paycheck loans industry is in a battle to continue doing business as usual while consumer advocates are working tirelessly to enact stronger regulation across the board. Both sides believe that they have the best plan for helping consumers. With the current White House administration, the payday loan industry seems to have a leg up on the competition. But, those who want tougher regulations aren’t going down without a fight. Consumers will have to wait and see who wins. To learn more about the battle that the payday loan industry is facing, visit the Personal Money Store.