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The payday lending industry has filed a lawsuit against the Consumer Financial Protection Bureau (CFPB) alleging a new rule could potentially end things for them.
Community Financial Services Association of America (CFSA), the main trade association for payday lenders, filed the lawsuit on April 9 in the U.S. District Court for the Western District of Texas, according to The Washington Post.
At issue is a CFPB rule, effective in August 2019, that could alter the way payday lenders do business. Lenders will be required to verify if borrowers can afford their requested debt prior to receiving money, and the number of times borrowers can take out consecutive loans will be capped.
The lawsuit has called the CFPB rule “draconian” and has alleged it would “virtually eliminate” the payday lending industry. The allegations also noted the rule was “was motivated by a deeply paternalistic view that consumers cannot be trusted with the freedom to make their own financial decisions.”
Dennis Shaul, CFSA’s chief executive officer, said of the lawsuit, “We do not take lightly that we are suing our federal regulator, however, we have long said we are pursuing all options with regard to the CFPB’s harmful small-dollar lending rule, and one of these options was litigation.”
This isn’t the first challenge against the rule. House and Senate Republicans have already introduced legislation to block its execution. Mick Mulvaney, the interim CFPB director appointed by President Trump, is reviewing it. He has said he’ll overturn the rule as soon as possible, reported Reuters.
Although payday loans make up a small portion of the financial industry, they can be prevalent in states with legal lenders. According to Pew Charitable Trust, approximately 12 million Americans take out these loans annually and pay more than $9 billion in fees. At the end of the day, most borrowers will pay more of the extras than the requested loan amount.
According to the CFSA’s lawsuit, the loans provide a lifeline for millions of consumers. Consumer advocates have a different take on the practice, claiming people get trapped in high interest rates and dishonest business practices.
Consumers who typically get payday loans might have other options available to them. Some credit unions offer Payday Lending Alternative loans, which are less expensive than typical payday loans. Local banks and online lenders might also extend personal loans to borrowers with bad credit, based on alternative lending criteria or by accepting some form of collateral.
Even though borrowers tend to seek out payday loans as an emergency source of cash, taking time to research other – potentially cheaper – borrowing options can reduce the likelihood of getting stuck with ballooning payments down the road.
Author: Dave Rathmanner
As the VP of Content at LendEDU, Dave regularly plans and writes content to help consumers with their personal finances. Dave’s work has been featured in the Chicago Tribune, Bloomberg, CNBC, US News, Yahoo Finance, NPR, and more.