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Payday Lending in the New Financial Reform Law

August 9, 2010

As you know, after a mammoth battle with the banks, on July 21 President Obama signed the financial reform bill into law.

You can read a big picture overview of what the bill accomplishes in this previous post, find more details about the great new mortgage reforms here, and read info about the unfortunate and unfair car dealer exemption here.

Next up:  payday loans.  These are nasty, short-term loans designed to trap borrowers in a long-term cycle of debt.  They have traditionally been regulated at the state level.  Fifteen states plus DC currently outlaw them, but other states haven’t taken enough action to protect their citizens from these usurious debt traps.  (A special shout out to Illinois and Wisconsin, which recently passed new legislation limiting payday lending in their states.)

Now, the CFPB will have jurisdiction over payday lenders – hooray!  Payday lenders are “nonbank” lenders, so the CFPB will be able to write and enforce regulations over all of them, no matter what size.  It will be the first federal regulator able to tackle these ultra-predatory lenders.  Many consumer groups, such as Consumer Union and the National Consumer Law Center (pdf), are calling upon the Bureau to make regulating payday lending a top priority.

While the CFPB won’t be able to impose usury caps, it will be able to ban certain forms of collateral – like a paycheck or access to bank account.  Such a ban would effectively end payday lending.  A ban on a car title as collateral could similarly end car title lending, another highly abusive type of loan.

The bad news on the payday lending front is that small payday lenders will have special access to the rule-writing process at the CFPB.  Before proposed rules are made public, they will be able to read and possibly influence them, which can delay the process for months and potentially weaken the rules.  It will be up to the regulators to resist pressure from payday lenders, even though they are given this special access.  This is just one more reason why it is crucial that the Bureau have a strong director, committed to real consumer protection:  it’s one more reason that President Obama should nominate Elizabeth Warren for this position.

Payday lenders’ special access came about as a result of the Snowe-Pryor amendment to the Senate bill, which you can read more about here.

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5 Comments
  1. teal1066 permalink
    August 11, 2010 2:42 am

    pay day loans can be like this i do not know this but par day loans are good option for short term only..

  2. Jay Speer permalink
    August 12, 2010 9:03 am

    Allowing the use of bad checks (checks written without the funds to back them up) to fund loans is one of the worst public policy decisions of our time. Even though it is clearly not a crime, many lenders accuse the borrowers of a crime if they don’t repay the loan (this usually occurs on about the 10th renewal of the loan). Giving lenders access to your bank account is also an awful practice because of the high risk of abuse and the power it gives the lender over the borrower.

    We all know this but….
    Payday loans are NOT short-term and
    300%+ interest is NEVER a good option.

  3. william sweet permalink
    August 12, 2010 10:28 am

    G O O D !

  4. September 16, 2010 12:17 pm

    Payday loans are for “SHORT TERM USAGE”,people have a choice to pay it off and be DONE or they can borrow again! Payday lending has helped so many people who do not have any other resources.If Payday lending goes out of business it will hurt the economy even more! Where are people with bad credit or no credit going to go to borrow money until their payday when an unexpected expense comes their way? I read all the time about how high the interest rate is but that’s ONLY if they CHOOSE to pay off their loan and continue to take out another loan! Bottom line, what’s the interest rate when somebody borrows $100.00 and the fee is $17.00 for 14 days? You do the math! One more thing, why do you pay over $300,000 for a $100,000 home on a 5.0% interest rate on a 30 yr term? Hmmmmm!!! Again, IT’S A CHOICE, bet if you paid off your mortgage in one year you wouldn’t pay that much!KEEP PAYDAY LENDING LEGAL!!!TOO MANY PEOPLE NEED THE SERVICE!!!

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  1. An Agenda for the CFPB « Americans for Fairness in Lending

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