The Battles over Payday Loans

Payday loans concept.Payday loans, sometimes called “cash advances,” “check loans” or “title loans” provide consumers with quick, short-term access to cash in emergencies, but have come under harsh criticism recently for high interest rates that can trap unaware consumers in debt. It’s not surprising that many payday loans end up in collections and lawsuits. While payday loan companies are not legally considered debt collection agencies, they are permitted to take action to collect debts consumers owe. They also forward debt to collection agencies and attorneys. Therefore, the battles over payday loans being reported almost daily in the media are of interest to the entire Debt Collection Industry. They include but are not limited to:

  • Should the CFPB be able to deny access for up to 84 percent of the ten million Americans who want payday loans each year?
  • Should the CFPB allow responsible sources of small-dollar credit to consumers to continue to make such loans?
  • Should in-house payday loan debt collections be governed by the FDCPA?
  • How can payday loan scammers be stopped?
  • Should states be able to pass their own payday loan regulations?

There Are More Payday Lenders in the U.S. than McDonald’s or Starbucks

Should the CFPB be able to stop 84 percent of the ten million Americans who want payday loans?

As reported on creditandcollectionnews.com 6/13/16, it is estimated that 10 million Americans will apply for payday loans this year. As a result, there is currently a battle between those who think the loans serve a necessary purpose and the CFPB’s efforts to lay down new rules that would require lenders to determine whether borrowers can afford to pay back their loans, restricting access to 84 percent of those loans and supposedly protect consumers. “The CFPB is proposing strong protections aimed at ending payday debt traps,” said Director Richard Cordray. “Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt.”

This topic is highly controversial, because many consumers have little to no ability to cover a short-term financial “crisis” like repairing a car, replacing critical appliances, or paying unexpected medical bills. They need access to some form of credit. The full press release announcing the rule can be found here. The complete proposal can be found here. Comments are due by Sept. 14, 2016.

Should the CFPB allow responsible sources of small loans to continue to make them?

The Independent Community Bankers of America® (ICBA) continues to “strongly urge that the new rule include meaningful options for reliable lenders whose personal loans exhibit lower risk situations and excellent performance. The rule must allow community banks to continue to have the flexibility to provide access to small-dollar credit, free of numerical and costly requirements in the underwriting process…. Main Street community banks are very familiar with their customers’ financial condition, history and ability to repay loans and do not steer consumers to unaffordable loan products.”

The CFPB proposal would permit lenders to offer two longer-term loan options: 1) Loans that mirror the parameters of the National Credit Union Administration “payday alternative loans” program—Interest rates capped at 28 percent and an application fee no more than $20. 2) Loans with terms not to exceed two years and with an all-in cost of 36 percent or less, so long as the lender’s projected default rate is 5 percent or less.

Should in-house payday loan debt collections be governed by the FDCPA?

Many payday lenders use in-house collection departments, which are not governed by the FDCPA or local and state laws, unless the company represents itself as a collection agency. For example, if a payday lender calls to collect a debt and claims to be a collection agency rather than the original lender, the FDCPA applies. Many debtors are unaware of their rights if a payday lender tries to collect debt in this way, and some lenders take advantage of this by violating FDCPA regulations, giving compliant collectors a bad name. Therefore, many collection industry professionals are lobbying to have all in-house payday loan collection efforts fall under FDCPA rules.

How can payday loan scams be stopped?

Any lenders who artificially inflate the amount of money owed may be committing fraud or extortion. If borrowers believes the lender is violating the law, they should contact a debt collections attorney, who may be able to negotiate with the company or sue to stop harassment. The FBI is aware that scammers contact consumers who don’t actually owe money on a payday loan, then proceed to make threats. They might state that the consumer will be sued within the next week if he/she does not pay the money. Consumers are warned to obtain information about the person who is calling anytime they receive a collection call. This is legally required even when a company is not covered by the federal law.

Should states be able to pass their own payday loan regulations?

The short answer is, “They already are.” However, some payday lenders find loopholes and continue business as usual. Despite 2008 reforms in Ohio that placed a cap on payday loan interest rate at 28 percent, Ohioans continue to pay some of the most expensive loan rates in the country, and one in 10 Ohioans has used a payday loan, a Pew Charitable Trust study shows. The average annual percentage rate is 591 percent for a two week payday loan in Ohio, due to a loophole in the short term lending act, says Nick Bourke, director of the Pew Project.

North Dakota has its own payday lending laws similar to other states. Although, one of the main differences between North Dakota and the other states is that North Dakota allows payday loan terms to last up to sixty days instead of the common thirty days. Citizens of North Dakota are allowed to borrow up to $600 and there is not a minimum amount for lending. Payday lenders in North Dakota charge an interest rate of $20 per $100 that is loaned out, which means that the interest rate is 20 percent for payday loans in North Dakota.

Consumers and collectors alike need to be aware of the payday lending laws peculiar to their state and to follow closely the results of the CFPB’s current proposal.

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