Federal regulators have finalized a new rule for payday lenders that removes a key provision developed under the Obama administration. Under the revised rule, lenders will no longer have to verify that borrowers can repay their loans when due.
Consumer advocates say without this protection borrowers are often trapped and have to borrow over and over again, at interest rates of up to 400%.
The Consumer Financial Protection Bureau – a supervisory body created in the aftermath of the 2008-09 financial crisis – tried to curb the practices payday lenders, by drafting a rule that was finalized in 2017. The Trump administration has been working to relax the rule since it took control of the consumer office at the end of the year.
The payday loan industry has welcomed the overhaul.
“CFPB’s action will ensure that essential credit continues to flow to communities and consumers across the country, which is especially important in these unprecedented times,” said D. Lynn DeVault, President of Community Financial Services Association of America, an industry trade group. .
Consumer groups have lambasted the content of the new rule and its timeline during a pandemic that has left tens of millions of people out of work.
“There’s never a good time to authorize predatory loans with 400% interest rates, but it’s the worst possible time,” said Mike Calhoun, president of the Center for Responsible Lending. “The pain caused by the CFPB gutting the wage rule will be felt most by those who can least afford it, including communities of color who are disproportionately targeted by payday lenders.”
The revised rule leaves in place another Obama-era provision that is designed to limit the ability of payday lenders to make repeated attempts to debit borrowers’ bank accounts. This measure – which is currently suspended by court order – can help avoid costly overdraft fees.
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