Early last month, the Consumer Financial Protection Bureau (CFPB) unveiled its much-anticipated proposal that would rein in the payday loan industry at the federal level. Despite drawing mixed reactions, the new rules and regulations, which would go into effect at the beginning of 2017, would require payday lenders to conduct an income check and to prevent consumers from taking out multiple loans. The consumer federal watchdog agency noted that it plans to reveal more rules soon.
Although some members of Congress are trying to delay the adoption of the regulations by one or two years, the CFPB has pledged to move ahead with the regulatory framework that states can follow.
CFPB director Richard Cordray hasn’t said much since releasing the 1,300-page rule. He finally opened up Monday, when he delivered a speech in Cincinnati, Ohio, where he touched upon a variety of subjects. One of them was the matter of payday loans, which he said will be overhauled with new guidelines.
With race becoming a hot topic issue, Cordray noted that high-cost payday loans affect black communities. Cordray explained that they are marketed as short-term financial relief for impoverished consumers, but they often end up trapping consumers into a vicious cycle of never ending debt.
He noted that black consumers take out six to 10 payday loans and end up re-borrowing traps. This, says Cordray, must be stopped, and the CFPB aims to “to seek out the truth about such practices” soon.
The CFPB head stated that it is attempting to end long-term debt traps that hurt the financial well-being of consumers, households and families. Despite the new rules, Cordray averred that the federal consumer watchdog agency’s is “extensive and ongoing.” According to the CFPB director, the new rules will curb lending, ensure payday advance companies with the law and ensure law enforcement agencies take action when it is determined that payday loan stores are in violation of the proposed list of rules.
“Our approach would allow those who can afford to borrow to get the credit they need without falling into a destructive cycle of perpetual debt,” Cordray said in a statement. “We will be taking comments on our proposed rule all through the summer, and then we will be working to finalize an effective rule that offers new federal protections to consumers for the first time.”
Cordray’s remarks come as a new study found that blacks and Hispanics are more likely than Asians and Caucasians to take out a payday loan. About one-third of blacks and Hispanics are more likely to take out a payday loan, compared to less than one-fifth for whites and Asians.
Critics often lambaste the payday loan industry by arguing that their alternative financial products, which often come with high rates of interest and other exorbitant charges, send consumers into perpetual debt. Supporters explain that payday loans, though expensive, are sometimes needed by those who do not access to conventional means of credit.