In a series of sweeping policy changes, the Consumer Financial Protection Bureau (CFPB) has imposed new rules on “predatory lenders,” including payday lenders and high cost installment loans. Lenders that provide small dollar loans will now have to adhere to the same laws as regular lenders, which will help shield consumers from predatory lending tactics. What does this all mean for the payday lending industry?
The Consumer Financial Protection Bureau’s Plan
The CFPB has set a plan in motion to limit payday lenders’ ability to impose extraordinarily high interest rates on consumers. Annual averages for these interest rates can reach as high as 391%, according to American Banker.
While the government typically regulates lenders and requires them to establish a borrower’s ability to repay their loans, some states lift these regulations for small-time lenders. This allows payday lenders to profit solely on the massive amounts of interest they charge, often putting consumers at risk of financial turmoil.
The Future for Payday Lenders
Unfortunately for most payday lenders, the business model of relying solely on issuing loans that people cannot repay is done. Many businesses will have to adapt to the changes set forth by the CFPB. The change in policy isn’t radical, just overdue; and payday lenders should be wary of future changes that could impact their business.
Predatory lenders will now have to take the steps required of many other loan services and ensure their customers are able to repay their loans fairly. While some loopholes may still remain for lenders to take advantage of, a new business model—even a new product entirely—may be necessary for many merchants in this industry.
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