The U.S. Consumer Financial Protection Bureau officials, spearheaded by its director Richard Cordray, presented public hearings on the steps of the bureau ensuring that consumers of loans with bad credit be treated fairly. They are specifically paying attention to payday lenders who are found to be taking advantage of low-income borrowers.
According to Cordray in a hearing in Birmingham, Alabama, “The purpose of all our research and analysis and outreach on these issues is to help us figure out how to determine the right approach in consumer protection and ensure that they have access to a small-loan market that is fair, transparent and competitive.” As you can remember, the consumer bureau was created by Congress under the Dodd- Frank Act, and was tasked to oversee payday lenders of loans with bad credit. The bureau’s work is driven by research and supervision, and its enforcement efforts are targeted on practices that pose immediate risk to consumers and are clearly illegal.
If this is true, the action by the consumer bureau could hit big payday lenders of loans with bad credit and affect companies that are mainly pawnbrokers but offer payday loans. Cordray, however, has not mentioned of any new regulations or any ideas that payday lending should be explicitly restricted. “We are thinking hard about these issues, and we do not have all the answers worked out by any means. Instead, we will look for ways that will develop a more vibrant, competitive market for small consumer loans.” he added.
In an interview, Cordray cautioned borrowers of loans with bad credit about the view on payday lending as “everybody can sit in their easy chair and count on everybody else to work everything out.” Generally, payday lending is a form of short-term borrowing in which a borrower leaves as collateral a post-dated check for the amount of the loan, plus a fee. Payday lenders provide loans ranging from $100 to $400, and are paid back in a few weeks. These lenders collect about $7 billion in fees each year as noted by Cordray.
Borrowers are advised by the bureau’s director to review the Truth in Lending Act for their protection. As required under the Truth in Lending Act, the annual percentage rate for the interest on payday installment loans must not exceed the range of 521%. However, when calculating the numbers, payday lenders are often compared to loan sharks.
In fact, consumer advocates have expressed particular concern over repeat borrowers who may fall into a debt trap driven by the high annual rates on payday loans. These issues that Cordray has been noting requires further looking into for a means to uphold consumer protection against the trap of payday lenders. “We plan to dig deep into this topic to understand what consumers know when they take out a loan and how they are affected by long-term use of these products,” he said.
To start their course of action, Cordray has laid down steps on how to uphold consumer protection. “Our examination authority is an important tool that will allow us to inspect their books, ask tough questions, and work with them to fix any problems we uncover. This includes looking at the materials and strategies that are used to market the loans, especially on issues regarding aggressive debt collection.”