[print-me]

Lenders Must Determine Upfront If Consumers Have the Ability to Repay Loans

October 5, 2017 The Consumer Financial Protection Bureau (CFPB) has developed a new rule which has common-sense protections cover loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments.

“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” said CFPB Director Richard Cordray. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”

Borrowers promise a large portion of their paychecks to repay loans with interest rates of over 300 percent or higher. Many times the borrowers are using their only form of transportation as collateral for the loan which, if they fail to pay on time leads to repossession of their vehicle which results in losing their job.  Even if the first loan can be repaid the high interest rate will force the borrower back to the lender for a new loan, often the next month.  According to the CFPB More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter. And nearly one-in-four initial payday loans are re-borrowed nine times or more, with the borrower paying far more in fees than they received in credit. 

This can become a never-ending debt trap resulting in repossessed vehicles, bounced checks (with additional fees) and evictions (due to unpaid rent) which ultimately affects the entire family.

CFPB’s Rule to Stop Debt Traps:

The CFPB rule aims to stop debt traps by putting in place strong ability-to-repay protections. The specific protections under the rule include:
Full-payment test: Lenders are required to determine whether the borrower can afford the loan payments and still meet basic living expenses and major financial obligations.
Principal-payoff option for certain short-term loans: Consumers may take out a short-term loan of up to $500 without the full-payment test if it is structured to allow the borrower to get out of debt more gradually.
Less risky loan options: Loans that pose less risk to consumers do not require the full-payment test or the principal-payoff option – limits on the number of loans per year and interest rate.
Debit attempt cutoff: The rule restricts the lender accessing the borrower’s checking or prepaid account without additional authorization from the borrower (helps to limit continuing over draft fees).payday loan

A factsheet summarizing the CFPB rule on payday loans


Who is the CFPB? The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.

About the Author:

Diane L. DrainDiane L. Drain is a well known and respected Arizona bankruptcy attorney. She is an expert in both consumer bankruptcy and Arizona foreclosure. Since 1985 she has been a dedicated advocate for her clients and spokesperson for Arizona citizens. Diane is a retired professor of law teaching bankruptcy for more than 20 years. As a teacher she believes in offering everyone, not just her clients, advice about the Arizona bankruptcy laws. She is also a mentor to hundreds of Arizona attorneys.

I would be flattered if you connected with me on GOOGLE+

*Important Note from Diane: Nothing on this website should be construed as establishing a lawyer-client relationship between you, me, the author of any page or the website owner (me) who happens to be a lawyer.  Everything on this web site is available for educational purposes only, is not intended to provide legal advice nor create an attorney client relationship between you, me, or the author of any article.  You may pick up some information about bankruptcy, foreclosure or the practice of law written by myself or others.  Any information in this web site should not be used as a substitute for competent legal advice from an attorney familiar with your personal circumstances and licensed to practice law in your state.*