New proposals to rein in the payday industry

If you have been following our blog, you know of the financial dangers associated with borrowing money through payday lenders. On the surface, payday loans seem to provide the perfect solution for those looking to obtain funds before they receive their next paycheck. Since the loans are covered by the borrower's upcoming pay, the borrowed money will be returned in a short period of time.

The trouble develops when the interest is factored into the repayment. While some loans are paired with an interest rate of 15 percent, others have a 75 percent rate attached. Should lenders fail to repay the full amount owed and renew their loan, the annual percentage rate can increase to a staggering 390 percent or more.

It is for this reason that the Obama administration's consumer board is proposing new restrictions for those operating payday loan services. The Consumer Financial Protection Bureau (CFPB) was given control over the industry when the 2010 Dodd-Frank Wall Street reform law took effect.

Should regulation pass, new guidelines for payday loans would include the following:

1. Creation of a "full-payment" test

Upon receiving loan request, payday lenders would be required to affirm that borrowers can afford to repay at $500 loan over a short period while still providing for basic living expenses.

2. Establishment of new limitations

Lenders would be prohibited from accepting auto titles as collateral for loans. Limitations would restrict the number of loans given to a customer in a certain time period. Regulations would also prevent lenders from subtracting funds from a borrower's bank account to repay a loan.

3. Development of alternatives for payday loans

In the place of payday loans, the CBPB proposes establishing loans that have longer terms attached. One proposal limits interest rates at 28 percent with a $20 administration fee included. The other would create an interest rate ceiling at 36 percent, to be repaid in installments.

Connecting the rise in "debt traps" with the payday loan industry, the CBPB has stated that these new regulations will allow borrowers to obtain loans while keeping their cars and maintaining a basic standard of living. While the proposals were made public in June 2016, legislation has not yet passed. Minnesota statutes currently cap payday loans at $350.

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