Crackdown on predatory payday loan industry is on the way

The Consumer Financial Protection Bureau (CFPB), a federal agency created in the wake of the 2008 Financial Crisis, recently proposed new rules on the payday lending industry, according to the New York Times. The new rules are designed to crack down on exorbitantly high interest rates and common industry practices that, the CFPB claims, trap consumers in a debt spiral that can become almost impossible to get out of. While the changes, which would likely take effect in 2017, would restrict who payday lenders could lend to, critics of the plan say it does not go far enough towards ending predatory lending outright.

New payday lending rules

The CFPB's new rules would require lenders to verify that potential borrowers are able to pay back their loans and would also limit the number of debit attempts a lender can make on a borrower's account. Repeated debit attempts when funds are not available in the debited account can lead to borrowers having to pay additional fees for each unsuccessful debit attempt.

The new rules would affect payday loans, deposit advance products, and auto title loans, as well as some open end loans and high-cost installment loans. The proposals are subject to a 90-day public comment period before going into effect. The CFPB expects the new rules to be in place in early 2017.

Predatory lending

The payday lending industry has been widely criticised for what many call predatory practices. A $500 loan that includes a $75 fee, for example, is effectively a loan with an annual percentage rate of 391 percent. While many payday loans have short two-week terms, they are often rolled over into new loans, in turn leading to more fees and a debt spiral that can be difficult for consumers to get out of. As ABC News reports, in one case a Missouri man's $2,500 in payday loans led to him owing $50,000 in interest.

While the new rules have been welcomed by many consumer protection advocates, others say that they do not go far enough. The Pew Charitable Trust, a non-profit that studies payday lending practices, says that they would have preferred if the CFPB had placed a cap on longer term small loan payments. The Pew Charitable Trust was hoping that the new rules would limit long term payments to five percent of the borrower's monthly income, but the new rules only require lenders to determine that borrowers can still pay their basic living expenses and debts.

Bankruptcy law

As the above article shows, it can be very easy to end up in a seemingly endless spiral of debt. One way of potentially getting out of this debt trap is by considering debt consolidation and bankruptcy options. A bankruptcy attorney can help those who are struggling with debt get back on their financial feet. By talking to such an attorney today, those struggling with mounting bills and creditor phone calls will have taken the first step towards a future free of debt.