Companies offering payday loans can expect to see Federal action against their predatory loans in the near future. The Consumer Financial Protection Bureau has begun supervising the payday loan industry in the beginning of 2012 and is taking steps to rein in abuse. The Bureau has produced a critical report on the industry and has required two payday companies to provide refunds and pay fees in the million dollar range due to the findings. The Bureau also plans to put rules in place that could provide additional protection for consumers.
The Bureau’s report also cited findings that some states were allowing payday lenders to charge over 500 percent in annual interest rates. Some also practice illegal tactics to recover money by harassing borrowers, calling them multiple times per day, garnering money directly from personal bank accounts and trying to arrest them under false pretenses.
Payday lenders have been around for years. The typical loan average is about $375 where the full balance is due in 14 days. It sounds reasonable, but if the borrower doesn’t pay the loan back in time, they get hit with a slew of interest and late fee charges.
Regulators across the U.S. are now seeking to impose stricter rules in an attempt to regulate payday lenders. Experts believe the move is a step in the right direction but is a smaller issue of a bigger problem. A professor with NYU Stern of Business, Arun Sundararajan states, “One the one hand, it’s a good move because the people are getting these loans don’t understand how bad things can get if they don’t pay them back. So one solution is to go after the lenders who are being exploitative, but it’s also important that we recognize there is a significant fraction of the United States that is unbanked.”
Going after payday lenders will protect borrowers from getting caught in the debt cycle, but industry experts say the root of the issue is providing safer credit solutions for Americans that don’t have enough banking options or help with personal finance.
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