What the CFPB’s New Measures Mean for Borrowers

Plenty has been said on what the Bureau’s new rules will mean for lenders, but we wanted to look at how the new rule might affect those looking for a loan.

What the CFPB's new measures mean for borrowers.

The Consumer Financial Protection Bureau is an agency created by Dodd-Frank (the Dodd–Frank Wall Street Reform and Consumer Protection Act). It offers financial protection to consumers. While it mostly deals with mortgages, credit cards, and student loans, it also covers short-term lenders (like payday lenders), installment loans, and debt collectors.

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Short-term lending is one of the areas that the CFPB has paid a great deal of attention to over the past couple of years. The agency has focused specifically on payday loans.

Payday loans are small, short-term loans which are used by many people to bridge the gaps between paychecks. These loans are used during certain times of the year, like back-to-school and the winter holiday season. They are often used to help with unexpected expenses like vehicle repairs, medical bills, or home repairs.

The New CFPB Rule

After years of research and much consideration, the CFPB has instituted new measures directed at short-term lenders who offer payday loans. During the past five years, the CFPB screened one million comments on the proposed rule from consumer advocates, faith leaders, payday and auto title lenders, payday borrowers, tribal leaders, state regulators, attorney generals, and others. The rule does not apply to longer term loans which some believed would be included.

Finalized on October 5, 2017, the new rule requires lenders to determine whether people have the ability to repay their loans before extending credit to them. It also limits payday lenders’ ability to automatically debit funds from borrowers’ accounts. This is an attempt to keep borrowers from racking up high fees or having their accounts closed due to insufficient funds.

As stated above, the rule primarily addresses payday loans which CFPB Director Richard Cordray calls “payday traps.” This new rule is said to protect consumers through the following measures:

  • Full-payment test - The rule has ‘ability-to-repay’ protections under which lenders must determine if a buyer can repay the loan
  • Principal-payoff option - Allows borrowers to take out loans up to $500 without passing the full-payment test, but only under certain conditions
  • Less risky loan options - Loans with less risk do not need to meet the full-payment test or the principal-payoff option
  • Debit attempt cutoff - For certain loans, new authorization from the borrower is required for the lender to access the borrower’s bank account after two straight unsuccessful attempts to take payment

Although the rule has been finalized, the CFPB’s new measures will not go into effect until 21 months after it is published in the Federal Register. Once they are in effect, all lenders who make loans covered by the new rule must comply with the CFPB’s requirements.

The Effects of the Rule on Borrowers

Up to this point, lenders have been the ones most concerned about the changes to the CFPB’s rules. But once the rules are fully in place, borrowers who depend on these short-term loans will also be concerned. Below are some common questions that the average borrower might ask regarding effects of the CFPB’s new measures:

  • Will it be harder for me to find a loan? - If your state of residence allows payday loans and other short-term loans, finding a loan provider should not be a problem. However, it could make qualifying for payday loans more difficult for some people. This is especially true for those who live paycheck to paycheck and have very little money in the bank. Some people who need cash may be forced to use pawnshops or other non-traditional means of borrowing money in financial emergencies.
  • Will I be better protected by the rule? - According to the details of the rule, there will be more protections in place for payday borrowers. Yet the protections could possibly keep some borrowers from qualifying for loans. Those without credit cards many have more difficulty finding extra cash when financial emergencies and unexpected expenses arise.
  • How does this change the rules in my state? – The new federal rules will be in addition to any rules already set up in your state. Each state makes its own rules for payday loans. In some states, like Georgia, New York and New Jersey, payday loans are completely prohibited by law or by statutory limits. That won’t change. Other states allow payday loans, but cap the annual interest rate charged on payday loans. That also won’t change. Maine, Oregon, and Colorado allow small loans at lower rates than found in other states. Thirty-two states have fewer regulations and allow high-cost payday loans. In some states, limits are placed on the number of small loans a borrower can take out annually. In the state of Washington, a person can only take out eight payday loans per year. Also, Virginia requires loans to be paid off within two pay cycles.

Educate Yourself

To learn more about short-term loans, OpenCashAdvance offers additional resources. Learn more about the loan process, read through our FAQs or read more articles on short term loans to educate yourself. And when you are ready to request a loan, visit our Get Started page to begin the process.