Policy Update: What's New With Payday Loans?
The handwriting has been on the wall for quite some time and earlier this month the CFPB proposed new rules to limit payday lending. Here’s a short CFPB video explaining how payday loans often trap debtors in a cycle they can’t get out of:
Here’s an audio resource and article from NPR explaining the new rules:
Under the proposed rule, so-called “payday,” “auto-title” and other short-term lenders would be required to determine that people they loan money to can make the payments and fees when they come due and still meet basic living expenses and major financial obligations.
With interest rates of 300 percent and higher, these lenders have fallen under greater scrutiny at both the state and federal level. In March of last year, President Obama said he supported tougher regulations for payday lenders who profit by charging borrowers super-high interest rates. “If you’re making that profit by trapping hard-working Americans into a vicious cycle of debt, you’ve got to find a new business model,” the president said.
Wondering how the payday industry feels about the new rules…(from Atlantic):
But unsurprisingly, the organizations that represent the payday industry are critical of the new rule. Dennis Shaul, the chief executive officer of the Community Financial Services Association of America, a payday-lending group, said in a statement, “The CFPB’s proposed rule presents a staggering blow to consumers as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense.”
With all the news generated recently about these rules, split your class into groups of two and have one person represent consumers and research why consumers need rules such as the ones prescribed by CFPB. Have the other person take on the role of lender and defend their practices. Let the debate begin!
Check out the NGPF Lesson on Predatory Lending
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.