The Consumer Financial Protection Bureau proposes to repeal sections of a rule aimed to protect vulnerable American borrowers from predatory payday lenders.
The federal agency for consumer protection in the financial sector is moving to dismiss requirements for lenders to guarantee borrowers can meet basic living expenses before approving payday loans. The underwriting requirement imposed under the Obama administration would force lenders to find out whether a customer can pay back loans. The agency said the new rule, is not yet implemented, would boost consumer access to credit.
The requirement was meant to curb the practice of issuing payday loans, which usually work by offering small loans to borrowers who are bound to repay in their next paycheck. A 2013 report by the bureau found that payday loans have fees amounting to an annual interest rate of more than 300%. The paper also revealed most of the loans are rolled over into another loan in as little as two weeks.
Bankers Favor, Consumer Groups Oppose
Bankers support the rollback of the rule, saying that the lenders’ duty to check borrowers’ ability to repay is tedious. The agency’s proposal will reduce bank customers’ dependence on less regulated and more costly fund sources such as online lenders, pawnshops, or check cashers, Richard Hunt, president and CEO of the Consumer Bankers Association said in a statement.
Meanwhile, consumer groups said abolishing the requirement would in effect destroy the protections to the consumers stated in the rule. Senior Policy Counsel at Americans for Financial Reform Linda Jun said the current rule is meant to protect borrowers from an abusive industry.
The bureau said it would accept comments on suspending the payday loan rule for 30 days and on abolishing the underwriting requirement for 90 days before coming to a decision.