Oct. 7 (UPI) -- The Consumer Financial Protection Bureau this week finalized rules curtailing payday loans, which can leave low-income workers facing staggering interest payments.
The payday and short-term loan industry thrives by offering low-income workers an advance on their paycheck in the form of a loan, usually less than $500, which comes with a high interest rate and is usually due within two weeks, or on the borrower's next payday. Most times, the borrowers are required to give the lender authority to remove funds from their bank accounts or write a postdated check to cover the amount due. If borrowers don't have the money in their account when the loan comes due, the amount rolls over and accrues even higher interest rates and late fees.
The CFPB estimated 80 percent of payday loans are rolled over within two weeks, and about 50 percent roll over at least 10 times. Some loans can reach a whopping 300 percent interest rate, turning a $500 loan into a $1,500 bill.
The payday loan industry is estimated to be worth upwards of $38.5 billion per year.
Under the new rule, which went into effect Thursday, payday lenders are now required to assess whether a borrower has the financial means to repay the loan and associated interest when it is due and still meet basic living expenses including rent, groceries and medical care. The rule also prohibits lenders to give a borrower more than three short-terms loans in succession. The rule allows lenders to skip the repayment test for loans under $500 if the terms permit a more gradual repayment schedule, a means of encouraging more borrower-friendly arrangements.
The rule does not, however, cap the amount of interest lenders can charge.
The new regulation also makes exemptions for small community banks and credit unions that sometimes offer short-term loans to customers or members, but do not make the practice a substantial part of their business model.
"The CFPB's new rule puts a stop to the payday debt traps that have plagued communities across the country," said CFPB Director Richard Cordray. "Too often, borrowers who need quick cash end up trapped in loans they can't afford. The rule's common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail."