The Consumer Financial Protection Bureau (CFPB) is taking steps to kill or water down the Payday Rule—a new regulation governing the actions of payday lenders—that it finalized just last year.
Payday loans are expensive, with annual percentage rates of often more than 300%. Many borrowers end up rolling over their loans, each time racking up more and more charges. (Paying a fee to delay repayment of a payday loan is generally called “rolling” it over.)
According to the CFPB, over 80% payday loans are re-borrowed within a month, typically when the loan is due or a short time thereafter.
Here’s how this kind of loan works: You give the lender a check and get back an amount of money that's less than the face value of the check. The lender cashes the check when the loan is due. Or you get cash from the lender and sign an agreement giving the lender the right to withdraw money from your bank account—or from a prepaid card to which money like wages, is regularly added—once the loan comes due.
Example. Suppose you give a payday lender a post-dated check for $300. The lender gives you $250 in cash and keeps the remaining $50 as its fee. The lender holds the check for a few weeks, until your payday. At that time, the lender cashes the $300 check. But unfortunately the check bounces, so the lender requires you to pay another fee of $50. At this point, you owe the lender $350—the $250 you borrowed plus the first $50 fee, plus a new fee of $50.
The cost is the same if, instead of a check, you gave the lender the right to access your bank account or a prepaid card. The lender deposits the money you borrow (minus the lender’s fee) directly to your account or card and the payday lender withdraws the payment when due. If you need to roll over the loan, the lender charges an additional fee, and so on.
In 2017, the CFPB issued a new rule—called the Payday Rule—that requires payday lenders to conduct a “full-payment test” to determine upfront whether a borrower can afford to repay a loan without rolling it over. (Certain types of less-risky loans, like those offered by community banks and credit unions, as well as those that offer the option to repay the debt more gradually, are exempt from the rule.)
The new rule also includes a “debit attempt cutoff” for certain payday loans. Under the rule, after two unsuccessful attempts to debit the borrower's account, the lender can’t debit the account again unless the borrower provides a new authorization. And, the lender has to give consumers written notice before attempting to debit an account at an irregular interval or amount.
Consumer advocates who support the Payday Rule say that tough laws are needed to rein in payday lenders, which usually target low-income borrowers who then end up in a cycle of high-interest, payday loan debt.
But opponents of the Payday Rule say that it unfairly hinders the payday loan industry, which serves millions of customers who often don’t have access to more traditional banking products.
The Payday Rule went into effect on January 16, 2018, though lenders don't have to actually comply with most of the provisions until August 19, 2019.
However, on January 16, 2018, the CFPB announced it was going to “reconsider” the Payday Rule. This announcement casts doubt on whether the rule will be implemented in its current form, if at all.
Effective date: January 16, 2018