January 20th, 2012
CFPB Update: Payday Loan Crackdown
The CFPB’s mission is “to make markets for consumer financial products and services work for Americans.” It’s already begun targeting credit scores and credit card agreements, and now has set its sights on abusive payday lending practices.
So what does this mean and why is it important?
What is payday lending?
A payday loan is a short-term loan. It’s meant to carry a borrower from now to the next paycheck. A consumer will write a lender a post-dated check or authorize an electronic funds transfer for the amount being borrowed, and at a fee. He gets the cash he needs now and the lender makes some money from the fee and potential interest, if the borrower fails to pay on time.
What makes some payday lending abusive?
Payday lenders typically charge exorbitant interest rates and many borrowers get caught in a cycle of rolling their loans over, according to Megan McArdle of the Atlantic. In other words, when the borrowers’ debt comes due, they’ll take out another loan to cover the first, and this cycle continues.
The CFPB understands that some consumers need the services of payday lenders. But the bureau hopes to hone-in on payday lenders with illegal practices, such as unauthorized debits on a borrower’s checking account and aggressive debt collection tactics.
What is the CFPB doing?
The bureau conducted a field hearing in Alabama, the state with one of the highest percentages of payday lenders per capita. It’s a part of the CFPB’s “nonbank” supervision program, which will also examine the practices of companies offering mortgages and private student loans. They will examine the entire lifecycle of a payday loan which includes each component, from marketing to third-party relationships. The examination process can be viewed online. The CFPB also aims to educate consumers to make sure they understand the payday loan process.
What can you do?
If you’ve ever experienced abusive payday lending practices, the CFPB wants to hear from you. Share your story online, which you can also submit anonymously. Educate yourself further by reading about three types of risky loans, including payday loans, and learn how you can avoid them.
Have a Karmic Day!
Bethy Hardeman, Social Media Maven
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