Regulators Clamp Down On Abusive Consumer Loans, But Affordable Alternatives Remain Elusive

In an effort to clamp down on abusive consumer loans, the Consumer Financial Protection Bureau (CFPB) has finalized a rule to end abusive consumer loans by requiring lenders to determine up front whether people can afford to repay the loans for which they are applying.

The new rules “cover loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments.”

Payday, auto-title, and deposit advance products are among some of the most predatory consumer financial products in the market—and their regulation is long overdue.

So abusive are payday loans that a $1,000 loan can balloon into a $40,000 debt—and it’s legal.  According to the Center for Responsible Lending (CRL), payday loans are debt trapsbecause they offer short-term loans to financially vulnerable consumers at rates that borrowers cannot afford to repay.

In response, borrowers end up rolling over their payday loans multiple times, frequently paying more in fees than the initial loan amount. CRL estimates that the typical payday loan borrower will pay more than $450 in fees for a $350 loan.

The typical rate for payday loans is $15 per $100 borrowed. Annualized, that’s an interest rate in excess of 400 percent, 10 times greater than the 30 percent penalty rate on credit cards offered by major U.S. banks.

Justification for the crackdown on payday loans is based on CFPB findings of predatory lending within that market that include:

  1. Four out of five payday loans are rolled over or renewed.
  2. Three out of five payday loans are made to borrowers whose fee expenses exceed the amount borrowed.
  3. Four out of five payday borrowers either default or renew a payday loan over the course of a year.
  4. Four out of five payday borrowers who renew end up borrowing the same amount or more.
  5. One out of five payday borrowers lives on monthly benefits and is trapped in debt.