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New Payday Loan Rule Aims to Protect Borrowers from Costly Debt Traps

  • On October 5, 2017, the Consumer Financial Protection Bureau (CFPB) issued a final rule on Payday, Vehicle Title, and certain High-Cost Installment Loans, requiring lenders of short-term, low-dollar loans, or balloon payment loans, to ensure that borrowers can repay the loan while also meeting major financial obligations and basic living expenses.
  • The CFPB and consumer advocate groups believe that short-term payday loans create a cycle of debt.
  • Individuals who use short-term payday loans may find those options limited in the future.
  • Employers can provide financial wellness programs to their employees to help them meet their financial goals.

Lenders must ascertain whether borrowers are able to pay back loans, meet living expenses

On October 5, 2017, the Consumer Financial Protection Bureau (CFPB) issued a controversial final rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans, which will require lenders of short-term, low-dollar loans, or balloon payment loans, to verify that borrowers have the ability to make required loan payments while also meeting major financial obligations and basic living expenses. Historically, payday lenders have not been obligated to consider customers’ ability to repay their loans. The rule takes effect 21 months after publication in the Federal Register.

The rule:

  • Applies to short-term loans of 45 days or less, and longer-term balloon-payment loans repaid with either one payment or a series of payments with one more than twice the size of the other payments.
  • Limits repeated payment withdrawal attempts from a consumer’s account. The lender must provide written notice before attempting to withdraw payment from a consumer’s account for the first time. If two consecutive withdrawal attempts have failed due to insufficient funds, the lender must obtain new authorization to make further withdrawals from the account.

Payday loans are short-term, high-cost cash advances, typically for $500 or less. Repayment is usually required on the borrower’s next payday, or upon receipt of the next pension check or Social Security check. Payday loans are available in 39 states, and state law determines allowable interest rates and maximum loan amounts.

In general, a borrower must repay a payday loan — and the accrued interest — in a lump sum. Interest rates on payday loans are notoriously high: on average, $15 for every $100 borrowed, or more than 391 percent a year. If the borrower can’t pay the debt by the loan due date, the lender may roll-over the loan by extending the due date and assessing additional interest charges.

Proponents of the new CFPB rule say it will prevent payday loan debt traps for the financially vulnerable. Opponents, many of them Republicans, believe it will reduce the availability of credit to consumers who need it the most. GOP lawmakers may look to repeal the rule using the Congressional Review Act, or the rule could be rewritten if President Trump names a new CFPB director. It’s rumored that the current director of the CFPB, Richard Cordray, may leave his post to run for governor of Ohio next year.

Average borrower takes out 8 payday loans a year

Roughly 12 million Americans use payday loan services each year, according to the Pew Trusts report. The document noted that, on average, borrowers take out eight payday loans a year, spending about $520 on interest with an average loan size of $375.

Workplace financial wellness programs can help employees manage their money

A majority of individuals who take out payday loans are employed, but are experiencing difficulty covering ordinary living expenses or an unexpected expense such as a medical bill or car repair. The associated stress from financial issues can even affect an employee’s job performance. Employers should consider providing a financial wellness program which offers education and financial tools to their employees to help them plan for and meet their financial goals. If your business is considering a financial wellness program for your workforce, check out the Paychex FinFit program.

Paychex will monitor the status of the CFPB rule and provide updates, when necessary.

Laura Cottrell

Laura Cottrell is a compliance analyst at Paychex, a leading provider of integrated human capital management solutions for payroll, HR, retirement, and insurance services for small and medium-sized businesses. She also serves as the chair of the American Payroll Association's (APA) Electronic Payments Committee, volunteers as a member of the APA’s Payroll Card Subcommittee of the Government Relations Task Force (GRTF), and is an Accredited ACH Professional (AAP).

This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.
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