The U.S. Consumer Financial Protection Bureau hosted an open hearing to discuss its proposals on Thursday. The proposals included restrictions on loan rollovers and freezes for new loans. They also restricted how lenders could tap into borrower’s bank accounts. These proposals apply to payday loans, auto-title loans, and deposit advances.

Richard Cordray, Director at CFPB stated that consumers should have the freedom to use these products without fear of getting stuck in a hole with no escape. On Thursday, President Obama spoke in Birmingham, Alabama, referring to payday restrictions as “a way of doing business” and stating that lenders who make money by creating debt traps should be ashamed. More payday loans details at https://bridgepayday.com/

Common: Payday loans

According to estimates, between 12 million and 19 million households use short-term loans in the United States at most once per year. These loans can either be obtained online from payday lenders or at strip-mall shops. A $300 payday loan costs approximately $45 and lasts for about two weeks. The annualized interest rate for payday loans is higher than 300 percent.

Kia Johnson, a Richmond resident, stated at the CFPB hearing that she had a $300 LoanMax Title loan. They took the vehicle and sent me a letter informing me that they had given me a $5,000 loan.

Advocates for consumers are worried about the proposed restrictions. Oponents argue that payday loans and other costly forms of credit with high interest rates and the ability to get your next pay check, drain resources from entire communities of cash-strapped households.

Lauren Saunders, National Consumer Law Center’s Managing Attorney, stated that payday loans “are one of the most predatory loan products currently available.”

A 2013 study by the CFPB found that only 13% of payday borrowers could limit their visits to the well. 48 percent of payday loan borrowers took out more than 10 loans each year. Three quarters of total fees were paid by recurring borrowers. This shows how important cyclic debt is to the industry’s financial system.

Saunders said that debt should not be taken if you have a gap in your income and your expenses.

Method is two-step

On Thursday, the CFPB presented a 2-step approach. This would enable lenders to avoid debt traps and protect consumers from getting caught in costly credit. Short term credit is a proposal that covers loans due in 45 days, including auto title loans and deposits advances, open ended lines credit, payday loans, and auto loan installments.

Option 1Two rollovers will be granted for short-term loans less than $500. The 60-day moratorium would be in effect on new borrowing. Two rollovers are allowed if the lender offers a reasonable “off-ramp” for debt repayment. The consumer bureau is still evaluating the options available for eliminating debt.

Option 2:Lenders would need to verify the income, payment history, and debt history of borrowers who are applying for short-term loans exceeding $500 to be able to determine their ability to repay. Borrowers would generally be subject to a 60-day freeze on any new loans. For borrowers in better financial standing, exceptions might be made.

Payday lending advocates believe that no matter what the rules, they should be able to balance consumer protection and emergency credit access.

Dennis Shaul, CEO of Community Financial Services Association of America, stated that payday loans are “an important source of debt” for millions of Americans living paycheck-to-paycheck. He stated that the proposals of the consumer bureau would lead to hundreds of small lenders closing down, and consumers being unable to access emergency credit.

Shaul stated that consumers should be protected while credit is available to them.

Emergency cash source

Even a high-cost loan can be a temporary solution to help you shut down the power or get your checking account balance overdrawn. Federal Reserve research has shown that those with poor credit found that storefront lenders are able to provide quick cash in emergency situations for those who don’t have other options.

Two options were available for longer-term loans with a payback period of between 45 days to six months, according to the CFPB. To determine the borrower’s ability to repay, lenders would need to verify income, spending, and borrowing history. A lender might also offer terms with the same protections as “payday alternative loans”, which are offered through the National Credit Union Administration. These terms include a 28% cap on interest rates, $20 application fee, and monthly payments caps equal to 5 percent of the borrower’s income.

Saunders said that many people struggle to make ends meet, but that high-cost loans were not the answer.

These rules would limit the lender’s access to borrower bank accounts. Lenders would have to notify borrowers at least three days before tapping the bank accounts or prepaid accounts of borrowers. Lenders will cease collecting after two unsuccessful withdrawal attempts. This will reduce the amount of fees banks charge to borrowers for attempted transactions.

Courtney Eccles is the anti-poverty Woodstock Institute policy initiative lead. He stated that “we believe it’s important for a borrower to choose what to repay and when.”

The CFPB can’t cap interest rates. This power is reserved to the states. Pew Charitable Trusts January 2014 research showed that 15 states have increased payday loan rates; nine have established limits and 27 have no cap on interest charges. The CFPB rules will give new protections to states with little regulation, without reducing existing protections in strict states.

In 2014, New York’s Attorney general cracked down on online payday loans that were not within the cap of 16 percent. This effectively banned payday lending in New York.