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Government seeks rules on payday debt

The U.S. Consumer Financial Protection Bureau recently proposed rules seeking to end loan traps that supposedly assure debt relief. The CFPB claimed that risky payday loan practices intentionally create conditions where consumers cannot repay their loans and then face the choice between defaulting, borrowing or not meeting living expenses.

The rules would govern payday loans, which are normally due on the next payday and have an annual percentage rate of at least 390 percent. The CFPB would also cover single-payment auto loans which require the use of the vehicle as collateral, are due within 30 days and typically have a 300 percent annual percentage rate.

Most consumers usually roll over the debt as it becomes due or re-borrow money within a short time. Over four-in-five single payment loans are refinanced within one month, and approximatel one-in-five repayment loan sequences end in default, oftentimes with auto loan borrowers having their vehicle seized.

The CFPB would govern loans with a total, all-in annual percentage rate over 36 percent and that seek repayment by gaining access to the consumer's account or paycheck or by holding the title of the borrower's vehicle. It found that over one-third of these loans end in default even after the borrower refinanced or reborrowed, and, similiarly, that nearly one-third of auto installment loans ended in default and that 11 percent of loans resulted in vehicle repossession.

Lenders would have to determine whether the borrower can afford each repayment amount and still meet their other living and financial obligations. For short-term loans and installment loans with a balloon payment, lenders would have to ensure that consumers could repay the loan without refinancing within 30 days. These new rules would make it more difficult to make borrowers refinance the same debt.

Lenders would also have to provide notice before seeking to debit the consumer's account for repayment.

Source: Consumer Financial Protection Bureau, "Consumer Financial Protection Bureau proposes rule to end payday debt traps," Accessed June 6, 2016

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