‘A big mistake’: Consumer Financial Protection Bureau drops payday loan limits
After a years-long battle, the Consumer Financial Protection Bureau has rolled back a series of proposals to limit payday loans in a move advocacy groups call a “serious mistake” that could potentially trap vulnerable people in debt.
The CFPB announced on Tuesday that it was rescinding the mandatory underwriting provisions – which essentially require lenders to confirm that borrowers can repay the loan before issuing it – framing the move as an effort to “maintain consumer access to the credit and market competition”. “
“A vibrant and well-functioning financial market is important for consumers to be able to access the financial products they need and ensure they are protected. Our actions today ensure that consumers have access to credit on a competitive marketplace, have the best information to make informed financial decisions, and retain key protections without impeding that access,” CFPB Director Kathleen L. Kraninger said in a statement.
“The Bureau protects consumers from unfair, deceptive or abusive practices and takes action against companies that break the law. We will continue to monitor the small dollar loan industry and enforce the law against bad actors,” Kraninger said.
The payday loan industry has courted controversy for years, with many critics denouncing the high interest rates and allegedly predatory practices that lenders use on often desperate customers that can lead to what are called “gotchas.” in debt”. The industry has also been criticized for allegedly targeting communities of color.
Advocacy groups were quick to criticize the CFPB’s announcement that it was removing the limitations, especially amid the coronavirus-induced financial crisis.
“By eliminating repayment capacity protections, the CFPB is making a serious mistake that leaves the 12 million Americans who use payday loans each year exposed to unaffordable payments at annual interest rates averaging nearly $400. %,” Alex Horowitz, the senior head of research at the Pew Charitable Trusts Consumer Finance Project, said in a statement.
Horowitz called on financial institutions to always respect protections, which encouraged traditional lenders to offer affordable installment loan options.
“Despite the CFPB’s abandonment of these essential safeguards for consumers, banks, credit unions and responsible lenders should reject lump-sum payments and instead offer installment loans to consumers on affordable terms,” it said. said Horowitz.
Linda Jun, senior policy adviser at the nonprofit group Americans for Financial Reform, said the CFPB’s announcement amid the COVID-19 crisis could have disastrous effects.
“In the midst of a global pandemic and unprecedented economic contraction, the CFPB chose to devote scarce resources not to consumer protection, but to dismantling the guardrails that would have given people greater protection. against predatory lenders,” Jun said in a statement.
“This will give loan shark-type payday lenders more leeway to exploit the current crisis by continuing to trap people in debt and hamper their financial recovery,” she added.