The Consumer Financial Protection Bureau (CFPB) made a bold move in proposing new rules that would help prevent individuals who use short-term lending services from falling into so-called “debt traps.” Often what happens with short-term lending services (sometimes known as “payday” loans) is that consumers borrow money at high interest rates, and when they are unable to pay the money back by the due date they are buried in extra costs and fees. Some interest rates on these loans reach as high as 300 percent or more.
With the proposed new regulations, payday lenders would have to do research beforehand into whether their clients could reasonably be expected to have the resources to pay off their loan at the end of the loan term. They must take into account living expenses and other big financial obligations.
Like any issue, this one has multiple sides. Short-term lending lobbyists argue that they fill a critical gap in the lending market, for individuals with poor credit who find themselves in a sudden emergency. They’ve spent millions lobbying for their case. Yet, to others, the story shows that too many are getting trapped in a never-ending cycle with these loans. Consumers start by thinking they are only going to take out one loan and then end up taking out more money to pay back the first amount.
The proposed changes come just after Google decided it will stop selling ad space to payday lenders at the top of its search feed. CFPB has decided to take the Internet issue even further by suing a company that shows up in the regular search listings and acts as a lead-in for the same short-term lending companies that are about to get cut out of the ad search. The case is important, since Internet searches are a big source of traffic for the short-term lending companies.
Header Image: Dan Kitwood / Staff