Prevention implies restricting lenders to give loans only to people, who would be able to pay back on time, without sacrificing food, rent or other necessities. All it takes is to require lender to verify borrowers' incomes before approving a loan.
Protection would require lenders to offer affordable repayment options with a longer due date, eliminating the need to “roll over” the loan several times, each time charging a fee.
As four out of five borrowers roll over the loan or take out new loans at maturity, verifying the borrower’s ability to repay could drastically reduce the number of loans and the related abuse.
The rules would apply not only to payday loans but also to vehicle title loans -- in which a car is used as collateral -- and other forms of high-cost lending. A panel of small business representatives and other stakeholders will review the rules before the bureau will make them available for public comments and then finalizes them.
According to an analysis of Census data by the Urban Institute, a Washington-based think tank, roughly 2.5 million households received a payday loan in 2013, an increase of 19% over 2011.
The Associated Press reported a typical story of how people in poverty become victims of loan sharks: Wynette Pleas of Oakland, California, says she endured a nightmare after taking out a payday loan in late 2012. A 44-year-old mother of three, including a blind son, Pleas borrowed $255 to buy groceries and pay the electricity bill.
But as a part-time nursing assistant, she worked only limited hours. Pleas told her lender she'd be unable to meet the loan's two-week deadline. The lender then tried to withdraw the repayment straight from her bank account even though Pleas lacked the funds. The result: A $35 overdraft fee and a bounced check. After the incident was repeated five more times, Pleas said the bank closed her account.
Collection agencies began phoning Pleas and her family. The, she learned that the $255 loan had ballooned to a debt of $8,400. At that point, she faced the possibility of jail. "It's not even worth it," said Pleas, who is trying to rebuild her finances and her life.