KANSAS CITY, Mo. -- The Consumer Financial Protection Bureau proposed a new rule Thursday to end payday loan debt traps.
The CFPB presented the rule during a hearing Thursday at the Kansas City Convention Center. Representatives from church groups, consumer advocates and people who have become victims of payday loan interest rates and fees spoke out regarding the new rule that would require payday lenders to make sure consumers have the ability to repay their loans before they sign on the dotted line.
Payday loans are short-term loans due on the borrower's next payday. When the borrower can't pay back on time, they rack up late fees and interest rates that can add up. In Missouri, which is considered the payday loan capital, there is no cap on interest that can be charged.
Some opposed to payday loans say interest rates and late fees set up the borrower to fail from the start.
For Elliot Clark, taking out a payday loan nearly ruined his marriage and his family. In 2003 his wife broke her ankle and couldn't work. His job wasn't enough to pay the bills so he took out five short-term $500 loans that later amount to $50,000 in interest.
“If it’s too good to be true, it usually is. But when you’re in a bind, a situation that you can’t get out of, you grasp at straws to keep your head above water to try and survive,” Clark said.
The proposed rule would cover payday loans, auto title loans and online loans.
“There are more payday loan offices in Missouri than there are McDonalds, Starbucks, and Wal-Marts combined,” consumer protection attorney Dale Irwin said.
3 requirements of the new rule proposed by the Consumer Financial Protection Bureau:
- The "full-payment test": Would require lenders to verify a borrower can afford to make payments and still meet basic living expenses.
- End the "debt trap" cycle: It would make it harder for lenders to re-issue or refinance a borrower's loans.
- Regulate penalty fees: Many lenders automatically collect payment out of customer's accounts, if there's not enough money, they also collect fees.
Micah Chrisman with the coalition led the rally before Thursday morning's hearing. He has met with people whose lives have nearly been destroyed by loans and their interest rates.
"It's about having transparency in the industry that you think you know what you're getting into, but you don't realize what it capitalizes into. And then they exploit that. The industry takes advantage of people's knowledge or lack of knowledge. It's a perpetual system to keep them stuck in this trap cycle."
Thursday's hearing began at 10 a.m., at the convention center and was open to the public.