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Preventing Lenders from Exploiting PayDay Loan Borrowers 
June 20, 2016

In early June 2016, the Consumer Financial Protection Bureau (CFPB) proposed new legislation that is targeted at ending payday debt traps. 

This legislation would require lenders to take steps to make sure that consumers have the ability to repay their loans before lending them the payday loan. While payday loans are illegal in New York State, this proposed legislation reflects a federal crack-down on lenders manipulating the vulnerability of borrowers, which is an issue that can come up in other lender-borrower situations--so it is important to stay informed about such regulation. Approximately five and a half percent of all Americans have used short-term loans in the past.

Payday loans can initially be a saving grace for those who live paycheck to paycheck and may need a quick loan to help them with unexpected expenses. However, as time progresses, so do interest rates and individuals who borrow these loans (generally for $500 or less) may end up paying excessive interest rates and end up in a whirlwind of debt. Lenders have a history of taking advantage of borrowers by charging obscene interest rates. This legislation would be a step in the right direction and would require more of a conscience effort to look into a borrower’s aptitude and ability to repay the loan.

The purpose of the new rule proposed by the CFPB is to better protect consumers from unscrupulous small-dollar loan practices. There is a concern that in trying to protect consumers, the CFPB rule will cut off access to short-term credit without providing another avenue for those who need these types of loans. In turn, this could force consumers to turn to more expensive alternatives, or worse, find themselves accessing unregulated or otherwise illicit venues for securing loans. The CFPB would impose a series of full payment tests on lenders, customized to different types of loans, requiring the firms to do extensive due diligence to see if borrowers can repay their loans before the money is loaned out. This would be the first time that the federal government has intervened in the payday loans market as this matter is typically left up to the states.

To sum up, the proposed rule by the CFPB would work to save borrowers from sliding down the slippery slope of debt traps that come from payday loans. These regulations are relatively new in nature as it is, as these credit products have been largely unregulated for more than 20 years. The federal government intends to create regulations which would require payday lenders to limit the interest rates they charge and review the ability of borrowers to repay the money. As mentioned previously, payday lenders are not present in New York. It is a violation of New York State law to make payday loans in New York State

Please contact HoganWillig with any questions about the above material, or if you wish to speak to an attorney, at (716) 636-7600. HoganWillig is located at 2410 North Forest Road in Amherst, New York 14068, with additional offices in Buffalo, Lancaster, Lockport, and Ellicottville.

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