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Will the lenders soon become borrowers?
The face of the financial industry may change soon due to new regulations that are being proposed. The proposal of these regulations came about due to the fact that consumers experience an unaffordable cycle of debt. The regulatory proposal aims to protect consumers from the debt trap but on the flip side, it may potentially push the lenders to a debt trap.
The Consumer Financial Protection Bureau (CFPB) set is eyes on the payday lenders. These are types of lenders who offer short-term loans that attract high-interest rates. The borrowers are mostly individuals who need immediate funds which are advanced to them against their future paychecks.
So as to sustain themselves and make more money through acquisition, most lenders have borrowed heavily. These borrowings may be made from the bond market. However, under the new rules proposed by the CFPB in March 2015, these lenders will need to look for alternative sources of funds so as to sustain their business. This would mean that they will need to restructure the debt loads of the short-term loan business will be eliminated.
These consumer protective measures aim at making the consumer able to take control of their financial choices. Debt traps will be eliminated because the lender is to extend credit to the borrower and also ensure that the borrower will be able to repay the amount. It has been reported in a Pew Charitable Trusts study that the borrowers who are vulnerable may end up paying interest that is calculated on a basis of annual rates that may go up to 400%. It is for this reason that the proposed rules impose strict regulations on the lenders.
In a measure to ensure that the borrowers are not vulnerable and able to repay the loans, the CFPB proposal states that the payday lenders ought to verify the borrower’s income and debt history so as to determine if they will be able to repay the loan. Also, they are required to offer repayment options that are affordable as well as to limit the number of loans that may be accessed.
These measures aim to protect the consumer from being vulnerable to exploitation and give them some control over their financial choices. The rules were created so as to secure the financial condition of the borrower. However, will they ensure that the borrowers will also have a good financial standing? The implications that may be imposed on the payday lenders may harm their form of business. This is because some of their usual practices are not allowed to take place under the proposed regulations. The rules limit the borrowers’ unsuccessful withdrawal attempts. This situation would otherwise lead to excessive deposit account fees which are charged by the lenders. Also, the lenders are required to issue a notice to their borrowers if they intend to access their accounts. The lenders are required to provide a 3-day notice to their consumers. This should be issued before they submit a transaction to the consumer’s bank, prepaid account or credit union. Only time will tell if the payday lenders will still be able to thrive and survive under the new regulations.