By: Brando Sencion, Program Coordinator of Santa Cruz Community Ventures
For years consumers have been “set up to fail” by short term lenders with services such as payday loans. Consumer Financial Protection Bureau (CFPB) has been calling for payday lenders to ensure that the borrowers have the ability to repay their loans, according to its terms and limit how much, customers can borrow.
Until today, payday lending was regulated by individual states policies. Some states had strict policy and others had no policies at all to protect families from these services. Thousands of store front payday loan services across the country, lend millions of dollars each year to families attempting to make ends meet. The inability of these families to repay the loans, more than often place them in a cycle of debt.
Under the new rules issued by the CFPB, payday loans will have to follow a complex set of guidelines to ensure the customer have the ability to repay what they borrowed. The lender is required to verify the borrower’s income and check other financial obligations such as rent, child support, student loans, etc. The short-term loans must be structured to allow the customer to gradually get out of debt. However, a short-term loan under $500, is not required to meet the affordability test. Additionally, the payday loan affordability test does not apply to lenders issuing less than 2,500 loans a year.
The newly issued policy is a great leap in the right direction, but there is more to be done. Other recommended policies for payday loans that need to be addressed are placing interest rate caps, limiting loan fees, limiting balloon payments and interest payments schedules.