Payday loans are short-term loans, typically reaching maturity in one to two weeks, that provide borrowers with small sums of money in exchange for paying them back upon receipt of their next paycheck. Many people consider payday lenders to be the evilest figure in the entirety of the financial services industry because they charge exorbitant interest rates. The average annual percentage rate for these loans is upwards of 400 percent, effectively making finance charges on one-week loans anywhere between $20 and $35 in interest charges and financing fees for every $100 borrowed.
One of the main reasons why people think payday lenders are bad is because they systematically target poor people in low-income areas. These borrowers effectively get in a cycle of having to fork over a major chunk of their paychecks each and every one- or two-week period until they pay off their debts in full some months later.
Maxine Waters, a Democratic member of the House of Representatives who serves the state of California, recently asked Kathy Kraninger, the Director of the Consumer Financial Protection Bureau (CFPB), to roll back a proposal from earlier this week that would effectively help payday lenders earn even more money by easing regulations and restrictions on them.
The first version of the Consumer Financial Protection Bureau’s rule was released nearly a year-and-a-half ago, way, way back in October 2017. Oversaw by then-Director Richard Cordray, the rule’s initial draft would have forced payday lenders to properly verify prospective borrowers’ income over the last three months and obtain valid, up-to-date copies of those potential borrowers’ outstanding liabilities. The Consumer Financial Protection Bureau originally thought up such a rule to force payday lenders to stop lending to people who consistently bite off more than they can figuratively chew when it comes to payday loans. Payday lenders would have only been able to make loans to people who could afford them without breaking the bank.
Yesterday, on Wednesday, February 6, the CFPB announced that it would try to get rid of the rule because it would not allow people to receive financing that they so desperately needed, effectively causing a major disruption in the financial services market. If passed, the rule would be kicked into action nearly two years from now, in November 2020.
Several other members of the House spoke out on the issue in agreement with Waters.