15 Jun 4 Rules that may give you more fair credit options.
4 Rules that may give you more fair credit options.
The CFPB or Consumer Financial Protection Bureau recently proposed four major changes to the payday lending industry in hopes of promoting more fair credit options.
If your finance nerds like us at Credit Fair-E, you have may heard about the recent payday loan rules proposed by the CFPB (Consumer Financial Protection Bureau). It’s an organization whose purpose is to, as you may have guessed, protect consumers like you from unfair financial practices of the finance industry.
Not everyone shares our passion for finance, so we created this article to help you understand what’s happening.
Frowned Upon Industry
Whether you share the opinion or not, the general consensus on payday lenders is that their evil. Well… maybe not evil but the phrases “abusive” and “unfair” do get thrown out there a lot. Why you ask? Well because the average borrower pays about $50 in fees per loan, with the average loan size of $375. Not only that, they typically end up “rolling over” the loan, sometimes as much as 8 times, to the tune of $520 in interest and fees. It doesn’t take a mathematician to see how $520 in interest and fees seems a little crazy when you only borrowed $375.
With those kind of average figures, it’s no wonder the CFPB decided to make some changes. So what do these new rules apply to? Generally speaking there are two types of loans covered, those with terms less than 45 days and those with terms greater than that 45 days that also meet the following conditions: APR greater than 36%, and are repaid directly from a consumer’s account/income or secured by a vehicle.
Here are the 4 changes condensed:
1. Payment Test
Althought this sounds like common sense, not all lenders actually verify that you can afford the proposed payments on the loans they give out. The new rule would require lenders to make an upfront determination of a consumer’s ability to repay a loan. This would involve verification of income, and credit checks to ensure that the consumer is able to meet their obligations. There is also a segment that caps the number of short-term loans made in quick succession.
2. Principal Payoff Options for Short Term Loans
This rule is an exception to the one above when consumers borrow less than $500. It allows borrowers to make payments against the principal amount of the debt, helping to reduce the amount of interest adding up. The borrower could have up to two extensions on the loan if they payoff at least one third of the principal with each extension.
3. Less Risky, Longer-Term Lending Options
This proposed rule offers lenders a means to avoid some regulation by offering one of two alternatives to a short term loan. The first is an option that is very similar to the National Credit Union Administration “payday alternative loans” program. The other is making the loans payable in roughly equal payments with terms not to exceed two years and an all in cost of 36 percent or less, not including a reasonalbe origination fee.
4. Debit Attempt Cutoff
We have all probably been in this situation at least once. Someone is coming into your account to pull money out for a payment, but you don’t have the money there. The bank then goes about charging you a fee, while the person or company trying to collect their money is unpaid. Well, for some people this can occur several times before they are able to put money into their account, resulting in a hefty amount of additional fees. The proposed rule would allow companies to attempt to draw payment up to two times, before having to seek additional borrower authorization to retry.
Plenty of Time for Changes
It is important to remember that these new rules are still not active, nor are they set to go active anytime soon. There will be plenty of time to allow for changes and lobbying on both sides of the aisle. It is important to understand these changes and more importantly why they are important. Whether it is an online installment loan or a short term loan for a quick fix, you deserve to receive fair credit with fair terms.
We will be following the industry changes very closely over the next year and be sure to keep you updated on any changes.