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New Rules on Payday Loans – Lenders Must Determine Borrower Ability To Repay

cfpb time for changeLenders Must Determine If Consumers Have the Ability to Repay Payday Loans That Require All or Most of the Debt to be Paid Back at Once

“The CFPB’s new rule puts a stop to the payday loans debt traps that have plagued communities across the country,” said CFPB Director Richard Cordray. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”

Payday loans are typically for small-dollar amounts and are due in full by the borrower’s next paycheck, usually two or four weeks. They are expensive, with annual percentage rates of over 300 percent or even higher. As a condition of the loan, the borrower writes a post-dated check for the full balance, including fees, or allows the lender to electronically debit funds from their checking account. Single-payment auto title loans also have expensive charges and short terms usually of 30 days or less. But for these loans, borrowers are required to put up their car or truck title for collateral. Some lenders also offer longer-term loans of more than 45 days where the borrower makes a series of smaller payments before the remaining balance comes due. These longer-term loans – often referred to as balloon-payment loans – often require access to the borrower’s bank account or auto title.

These loans are heavily marketed to financially vulnerable consumers who often cannot afford to pay back the full balance when it is due. Faced with unaffordable payments, cash-strapped consumers must choose between defaulting, re-borrowing, or skipping other financial obligations like rent or basic living expenses such as buying food or obtaining medical care. Many borrowers end up repeatedly rolling over or refinancing their loans, each time racking up expensive new charges. More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter. And nearly one-in-four initial payday loans are re-borrowed nine times or more, with the borrower paying far more in fees than they received in credit. As with payday loans, the CFPB found that the vast majority of auto title loans are re-borrowed on their due date or shortly thereafter.

The cycle of taking on new debt to pay back old debt can turn a single, unaffordable loan into a long-term debt trap. The consequences of a debt trap can be severe. Even when the loan is repeatedly re-borrowed, many borrowers wind up in default and getting chased by a debt collector or having their car or truck seized by their lender. Lenders’ repeated attempts to debit payments can add significant penalties, as overdue borrowers get hit with insufficient funds fees and may even have their bank account closed.

Rule to Stop Debt Traps

The CFPB rule aims to stop debt traps by putting in place strong ability-to-repay protections. These protections apply to loans that require consumers to repay all or most of the debt at once. Under the new rule, lenders must conduct a “full-payment test” to determine upfront that borrowers can afford to repay their loans without re-borrowing. For certain short-term loans, lenders can skip the full-payment test if they offer a “principal-payoff option” that allows borrowers to pay off the debt more gradually. The rule requires lenders to use credit reporting systems registered by the Bureau to report and obtain information on certain loans covered by the proposal. The rule allows less risky loan options, including certain loans typically offered by community banks and credit unions, to forgo the full-payment test. The new rule also includes a “debit attempt cutoff” for any short-term loan, balloon-payment loan, or longer-term loan with an annual percentage rate higher than 36 percent that includes authorization for the lender to access the borrower’s checking or prepaid account. The specific protections under the rule include:

  • Full-payment test: Lenders are required to determine whether the borrower can afford the loan payments and still meet basic living expenses and major financial obligations. For payday and auto title loans that are due in one lump sum, full payment means being able to afford to pay the total loan amount, plus fees and finance charges within two weeks or a month. For longer-term loans with a balloon payment, full payment means being able to afford the payments in the month with the highest total payments on the loan. The rule also caps the number of loans that can be made in quick succession at three.
  • Principal-payoff option for certain short-term loans: Consumers may take out a short-term loan of up to $500 without the full-payment test if it is structured to allow the borrower to get out of debt more gradually. Under this option, consumers may take out one loan that meets the restrictions and pay it off in full. For those needing more time to repay, lenders may offer up to two extensions, but only if the borrower pays off at least one-third of the original principal each time. To prevent debt traps, these loans cannot be offered to borrowers with recent or outstanding short-term or balloon-payment loans. Further, lenders cannot make more than three such loans in quick succession, and they cannot make loans under this option if the consumer has already had more than six short-term loans or been in debt on short-term loans for more than 90 days over a rolling 12-month period. The principal-payoff option is not available for loans for which the lender takes an auto title as collateral.
  • Less risky loan options: Loans that pose less risk to consumers do not require the full-payment test or the principal-payoff option. This includes loans made by a lender who makes 2,500 or fewer covered short-term or balloon-payment loans per year and derives no more than 10 percent of its revenue from such loans. These are usually small personal loans made by community banks or credit unions to existing customers or members. In addition, the rule does not cover loans that generally meet the parameters of “payday alternative loans” authorized by the National Credit Union Administration. These are low-cost loans which cannot have a balloon payment with strict limitations on the number of loans that can be made over six months. The rule also excludes from coverage certain no-cost advances and advances of earned wages made under wage-advance programs offered by employers or their business partners.
  • Debit attempt cutoff: The rule also includes a debit attempt cutoff that applies to short-term loans, balloon-payment loans, and longer-term loans with an annual percentage rate over 36 percent that includes authorization for the lender to access the borrower’s checking or prepaid account. After two straight unsuccessful attempts, the lender cannot debit the account again unless the lender gets a new authorization from the borrower. The lender must give consumers written notice before making a debit attempt at an irregular interval or amount. These protections will give consumers a chance to dispute any unauthorized or erroneous debit attempts, and to arrange to cover unanticipated payments that are due. This should mean fewer consumers being debited for payments they did not authorize or anticipate, or charged multiplying fees for returned payments and insufficient funds.

The CFPB developed the payday rule over five years of research, outreach, and a review of more than one million comments on the proposed rule from payday borrowers, consumer advocates, faith leaders,  payday and auto title lenders, tribal leaders, state regulators and attorneys general, and others. The final rule does not apply ability-to-repay protections to all of the longer-term loans that would have been covered under the proposal. The CFPB is conducting further study to consider how the market for longer-term loans is evolving and the best ways to address concerns about existing and potential practices. The CFPB also made other changes in the rule in response to the comments received. These changes include adding the new provisions for the less risky options. The Bureau also streamlined components of the full-payment test and refined the approach to the principal-payoff option.

The rule takes effect 21 months after it is published in the Federal Register, although the provisions that allow for registration of information systems take effect earlier. All lenders who regularly extend credit are subject to the CFPB’s requirements for any loan they make that is covered by the rule. This includes banks, credit unions, nonbanks, and their service providers. Lenders are required to comply regardless of whether they operate online or out of storefronts and regardless of the types of state licenses they may hold. These protections are in addition to existing requirements under state or tribal law.

For more info on Payday loans see: https://toddmurphylaw.com/payday-loans-the-most-despicable-loans/

 

A factsheet summarizing the CFPB rule on payday loans is available at: http://files.consumerfinance.gov/f/documents/201710_cfpb_fact-sheet_payday-loans.pdf

 

Text of the CFPB rule on payday loans is available at:  http://files.consumerfinance.gov/f/documents/201710_cfpb_final-rule_payday-loans-rule.pdf

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About Payday Loans

In a word, DON’T take them, if you haven’t already.

Payday loans are a form of financial cancer, primarily invading economically disadvantaged areas.

With interest due over a 2-week period of 30 percent or more, the annualized rate is upwards of 800 percent, not including fees. A loan from a friend, or an advance on your paycheck, or a cash advance on your credit card are all vastly preferable to taking out a payday loan.

Many low-income borrowers fall into a vicious cycle of taking an additional payday loan to pay off the previous one, coming to rely on these loans as their source of income. This is a toxic pattern, soon leaving the borrower completely unable to repay. Many lenders will ask for a post-dated check as collateral on the loan, and threaten the borrower with criminal prosecution and jail for having written the bad check in the event of default or bankruptcy.

Payday loans are unsecured debt and can be wiped in a Chapter 7 filing, or restructured and mostly wiped in a Chapter 13 filing. Lenders may attempt to challenge the discharge of the loan, claiming the borrower never had intent to repay. Courts may find that the original loan in a series of payday rollover loans was earlier than the 90-day limit preceding bankruptcy required by law to wipe a debt in a bankruptcy settlement.

If you have taken a payday loan, it’s a good idea to wait until 90 days after the due date on the last of them to file for bankruptcy.

Payday lenders are often unscrupulous and predatory in their sales and collection practices.

If you’re in trouble with a payday lender, or fallen into the vicious circle of payday rollovers, Todd Murphy Law can help.

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Western Sky To Stop Payday Lending

Western Sky On-Line Payday Lender To Stop Making Loans!

I have written about payday loans many times and it always disturbs me to see what sharks these guys are. As a bankruptcy lawyer in New Jersey, I often see people who are in financial distress turn to some pretty unsavory companies.  Payday lenders are the scum of the earth and the damage inflicted because of such loans is nothing short of terrible.

Lately there has been a good deal of press about payday lenders with several states launching investigations and other actions.  Today, one of those companies, Western Sky Financial, says it will stop making loans.  As reported in The Washington Post an other news services that Western Sky will no longer be making their ultra high interest loans after September 3 as a result of governmental enforcement actions.

As being reported in the Wall Street Journal, several states have filed enforcement actions against Western Sky alleging that its loans violate state licensing and lending laws.  Western Sky contended that it was a entitled to tribal immunity because one of its owners is a member of the Cheyenne River Sioux tribe.  To date, every court that has considered this proposition has rejected Western Sky’s claim that it is entitled to tribal immunity.

Unfortunately, even though Western Sky says it will stop making loans, there are a large number of “loans” still outstanding.  If you have a payday loan from an out-of-state lender or an on-line lender, you should consult with a lawyer in your area to see if that loan is also illegal.

Considering bankruptcy?  Todd Murphy, a NJ Bankruptcy Attorney, is the New Jersey Bankruptcy Lawyer people have trusted for over 15 years for Chapter 7 Bankruptcy and Chapter 13 Bankruptcy.  Our office is conveniently located to serve all of Essex County, Bergen County, Passaic County, Hudson County, Union County, Morris County, and Middlesex County.

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Payday Loans: The Most Despicable Loans

Payday_loan_shop_windowPayday loans are indeed the most despicable loans one can get and now online payday loan lending is one of the fastest growing areas of lending.

What Is A Payday Loan?

Payday loans are short-term un-secured loans to be paid back at the borrower’s next pay day.  A fee is charged at either a flat-rate or a percentage of the loan.  Most lenders don’t verify employment or income. The loan has traditionally been taken out at a store-front where the borrower writes a post-dated check for re-payment. Lately, payday lenders are increasingly going online. In an online payday loan, the cash is deposited, less the fee, directly into the borrower’s account with the expectation of re-payment on the next payday through automatic withdrawal from the borrower’s account.

A simple example: Borrow $100.  Fee of $10.  Lender gives borrower $90.  Borrower owes $100 on the next payday.  Effective interest rate 10%.

Roll-Over Is How They Get You.

The problems start when the borrower doesn’t have the money to re-pay the loan on time.   This is exactly what the lender is hoping for.  If the lender tries to cash the check, the borrower incurs bounced check fees from its bank and, worse, fees to extend the loan from the payday lender and higher interest rates.

Example continued: Borrower rolls-over the $100 loan.  Additional fee $10.  Total fees now become $20. Borrower now owes $110.  Effective interest rate 20%.

Usually what happens is the borrower knows they don’t have the cash and they contact the lender to roll-over the loan for an additional fee.  The same thing happens again and again until the borrower realizes there is just no way she can repay the loan.

Extended example: Borrower rolls-over the $100 loan a total of 5 times.  Additional fees $50.  Total fees now $60.  Borrower now owes $150.  Effective interest rate 66%

So Get Another Loan To Re-Pay The First Loan.

Once the borrower has extended the first loan a few times, she realizes she can never re-pay that first loan.  The answer, she thinks, is to take a second loan to re-pay the first.  At least that stops new fees on the first loan, right?  Wrong!  Now the process starts again on the second loan.  Fast forward a couple of weeks and now this loan can’t be re-paid either.

New example: new loan to re-pay the first $166.  Borrower receives $150. New fees $16. Effective interest rate on this new loan 10%.

Example after the roll-over: Borrower rolls-over the second loan 5 times and incurs additional fees of $80 for total fees of $96. Effective interest rate on this second loan is now 57%.  But, remember all of this went to pay the first loan of $100, no new cash was received by the borrower.  Therefore, the interest rate on that first loan of $100 is now 146%.

And Take Another Loan…

The good thing for the borrower is that payday lenders don’t check credit so they don’t know if a borrower is behind on other payday loans.  At this point, the borrow can’t pay back the second payday loan so she just takes out another one and ignores paying the first.  And so it goes until the guys who aren’t getting paid start actions to get their money.

Aggressive Collection Actions.

Payday loan lenders are some of the most unscrupulous collectors of their money on the planet.  They will resort to anything including impersonating Police or FBI officers to threatening arrest and jail time.  Eventually, a lender will sue the borrower to get a judgment then garnish the wages of the borrower for not only the originally amount but also for all of the fees owed and costs of collection including attorney fees.  You can see how ugly this can get.

Just Say No To Payday Loans.

Payday loans are the most despicable loans you could ever become involved with.  Although I know that people who resort to payday loans have trouble getting credit from traditional sources and are usually pressed for cash, there are other options.

Online Payday Lending Is Growing.

The volume of online payday lending—a term for smaller, short-term loans at high interest rates—grew to $18.6 billion in 2012, up 10% from the previous year, accounting for nearly 40% of industry-wide payday-loan volume, according to investment bank Stephens Inc.

Payday Lenders Know The Law.

Thirty-five states allow payday lending, while 15 others and the District of Columbia effectively ban such loans, mainly through interest-rate caps. But many Indian tribes have begun making loans over the Internet and argue they are sovereign states not subject to state-level regulation. Other lenders assert they don’t have to comply with state laws if they set up shop offshore or in states with favorable regulations such as Delaware and Utah.