GET CASH NOW! A neon green sign boasts a quick fix for your financial woes as you count out the few dollars you have to pay bills and buy groceries for your children. Although you are employed, this has been a particularly hard month. The payday loan, so named because you usually have to pay the loan back by your next payday, could be the solution to your problems — or it could be a debt trap.
For most borrowers it ends up being a debt trap. Borrowers start with one loan, but they often cannot afford to pay it back by their next payday. The lender then gives the option to take out another loan to cover the cost of the original loan. These “churned loans” are the hallmark of the predatory payday lending industry. Borrowers who fall into the trap end up going deeper and deeper into debt with numerous small, consecutive, short-term loans at an average APR of nearly 400 percent.
Payday loans in Oklahoma are covered under the Deferred Deposit Lending Act. Loans can be given for a maximum of $500 per loan and a maximum APR including fees of 396 percent. Oklahoma has some other restrictions in place, such as a cooling off period after the fifth consecutive loan and extended repayment plans, but these restrictions are relatively weak compared to many other states, and Oklahoma has one of the highest payday loan usage rates in the country.
Recently, the Consumer Financial Protection Bureau (CFPB) proposed new rules to change how the national payday loan industry operates. The proposed rules would make sweeping changes to the payday loan landscape that promise to greatly reduce the number of people falling into debt traps. However, they do not institute some key necessary changes to completely eliminate the predatory nature of these loan products.
What the Rules Do
The new rules seek to lessen the likelihood a person will fall into an endless cycle of debt. For example, they require lenders to notify the borrower at least three business days before attempting to collect payment, and if after trying twice to collect payment there are insufficient funds, the lender must cease attempting collection from that account. This protection is a response to a key component of the cycle of debt. Borrowers incur overdraft fees from their bank after lenders repeatedly attempt to collect the debt, often forcing them to take out more loans just to cover the new fees.
In addition to these general rules, CFPB is proposing new restrictions on short-term loans (with a term of 45 days or less) and longer-term loans with an APR greater than 36 percent. The proposed rule requires lender to choose between two options. The first option for lenders is to make a reasonable determination of the borrower’s ability to repay, which would require the lender to take into account the borrower’s basic living expenses and obtain and verify the borrower’s income and major financial obligations. Lenders would be prohibited from making a covered short-term loan to someone who has already taken out three short-term loans within 30 days of each other.
The second option for the shorter-term is to lend a maximum of 3 gradually smaller loans. However a lender could not use this method if it would result in the consumer having more than six short-term loans during a year.
For covered longer-term credit, the rule requires a lender to choose between two methods of lending. Like the short-term loan, the longer-term must make a reasonable determination of the borrower’s ability to repay or use one of two options that limit the number of loans a borrower can take out in a 180-day period and limit the fees a lender may charge.
What the Rules Do Not Do
The rules don’t extend nationwide the restriction implemented by many states of a 36 percent APR cap to curb predatory lending practices. The 36 percent APR cap does apply nationally to active military and their families through the Military Lending Act. However, extending this important protection to all Oklahomans will require action by state lawmakers.
Another limitation to the new rules pointed out by consumer advocates is that lenders are allowed to make six unaffordable short-term loans to each individual borrower, and restrictions are not triggered until the seventh loan.
What You Can Do
Citizens still have until September 16 to comment on the new rules. The Stop the Debt Trap Campaign by a coalition including Oklahoma Policy Institute and about 500 other civil rights, consumer, faith, veterans, seniors, and community organizations from all 50 states has an online form where you can submit comments on the new rules at http://stoppaydaypredators.org/. You can read more about the CFPB proposal here.