The Consumer Financial Protection Bureau has proposed new rules that could upend the loans industry and help consumers get out of a never-ending credit cycle. There are many people caught up in this vicious cycle wherein they are paying for debt by borrowing some more money and end up having no savings at all and at the same trapped in a credit hole. Once these rules are approved then lenders will have to verify loaners’ capacity to pay off the loan and the number of times they are allowed to take successive loans. The specific type of loan highlighted during the meeting is the payday loan because it is the most common applied for by people in the workforce. The scope of the proposed rules covers all type of loans and not just payday loans, but the latter has just been singled out as a perfect example.
The Reason of the Proposal
The CFPB has observed that a lot of people who are resorting into loans are not actually saved out of financial problems but are instead buried deep in debt sugarcoated by their capabilities to once again apply for a loan in order to pay out the existing one. There are people who end up skipping important bills just to be able to pay for their loans and if this cycle continues then they could end up filing for bankruptcy once they earned bad credit reputation.
In an article at Chicago Tribune, statistics say that 80% of people who take advantage of payday loans end up with a repeat loan which means they aren’t able to escape from recurring fees even through the initial loan. 44% of consumers also take successive loans up to 4 times in a row. The numbers are really alarming indicating that finance companies are the ones gaining from the so-called financial assistance programs instead of the consumers.
Another issue they would like to address are the steep fees that goes along with these loans. The median as of today is $15 for every $100 borrowed that could amount to an outstanding 391% on a median loan of $350. When it comes to other type of loans that involve bigger amounts of money then the fees cannot go higher but the money at stake is significantly huge.
When will the rules take effect?
As of now, CFPB’s proposed rules amendment is still pending and waiting for approval from the Board. Once approved, these rules will drastically change the loans industry and there will be a lot of finance companies that will be affected. The rules are clearly to the advantage of consumers and no wonder that banks and finance firms will try to counter this amendment with a modification of the rules that would be beneficial to both parties. It can be expected that CFPB will continuously modify these proposed rules until a final version that would satisfy everyone is drafted. This may take a year at most before the new rules are finally implemented.