New proposed rules by the Consumer Financial Protection Bureau (CFPB) would lead to substantial consolidation in the short-term payday industry of almost 70%. For the last few years, the CFPB has warned that it may take action against payday lenders due to claims that payday lenders perpetuated consumer debt. A recent report by global consulting firm, Charles River Associates, projected that the new rules would reduce payday loan revenue by 82 percent.
The CFPB outlined a framework for the proposed rules; lenders could choose between debt prevention and debt trap protection. Under the debt prevention option, lenders would verify a prospective borrower’s income and debt history to assess their ability to repay a loan, before lending money. This plan is similar to what a consumer would have to go through if they wanted a conventional loan from more traditional lenders like a bank or small loan association.
The second option involves debt trap protection that would not require lenders to determine a consumer’s ability to pay, but would limit all loans to only $500 with one finance charge. In addition, payday lenders would be unable to hold a vehicle title as collateral. The changes if enacted, could have a monumental effect on the industry, especially in areas with a high concentration of monoline lenders where many in the local population are unable to qualify for any other kind of loan.
Here is how payday loans work: a consumer needs cash fast and may not qualify for a traditional loan, so they borrow a few hundred dollars from a payday lender. But lenders only give them a short period to repay the loan. In addition, the consumer writes a check for the cost of the original loan plus fees. The process seems so easy that the consumer generally makes multiple loans while being charged between $20 and $55 per transaction in fees. The borrower is only given a small window to pay back the loan with rates that can reach up to 700 percent. And often cannot pay enough in time to pay on the principal of the loan.
Payday loans have become popular because they are a fast and easy way for consumers to get quick cash. The CFPB cautions consumers against payday loans as they are really easy to get into but very difficult for consumers to pay back. The consumer advocate agency fears that most borrowers will not have the time or money to repay the high interest on payday loans, which can lead to a vicious cycle of abusive lending.
The CFPB will be ruling soon on the new proposed rules. But payday loan merchants can still make major profits in the lending industry. eMerchantBroker.com has the payday loan merchant account managers that can keep your payday business generating profits with multiple payment options for your customers.