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With the recent charges of the U.S. agency against protecting consumers from financial abuse, a proposal was unveiled that would set limits on “payday” loans or short-term borrowing, which can account maximum of 390 percent interest rates.

The said proposal of the Consumer Financial Protection Bureau allows lenders to identify if some borrowers have the funds to take out a debt, while there are restrictions on loan rollovers.     

Generally, pay lenders provides cash for low-income borrowers in a pinch, but could not access financing from prevailing banks. It was named after a borrower would ask out an emergency loan and repay it with the next paycheck. As the loans are often non-collateral, there’s a risk for lenders of not being repaid and charge higher rates.        

"Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt," Richard Cordray CFPB Director said, citing the proposal as “mainstream” and “common sense.”

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"It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey," he added.

Subsequently, the industry has engaged in CFPB’s new regulation since the 2010 Dodd-Frank Wall Street reform law approved an authority on the payday loan market, while expectations of the new federal policies have already involved political fractures on Capitol Hill.   

Furthermore, the Federal Bureau of Investigation, along with the Internal Revenue Service has compelled an alleged fraud and racketeering in the industry. Among the targets of “Operation Chokepoint” are payday lenders, which implies an FBI investigation into business connections between banks and prospective law-breaking firms.  

CFPB Proposal on Payday Loans

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Based on a summary, the proposal of CFPB includes a test of “full payment” for borrowers with an amount of $500 over a short period. Lenders, therefore, would identify whether the borrowers have the funds to repay loan payment and still meet basic living expenses.

Hence, it would streak lenders from taking auto titles as collateral and it could hardly "push distressed borrowers into reborrowing." The amount of short-term loans that are made in quick succession would also be covered.

As part of the proposal, the lender will have limited tries to debit a borrower’s bank account for an excellent payment, citing that failed withdrawal goes rack up bank fees for borrowers, CFPB said.

It includes two alternatives for long-term loans under the proposal. One cap interest rates at about 28 percent, while for the application fee settled at $20. The latter involves installment loans of equal payment amounts, with the overall cost, capped off the loan at 36 percent.

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