The federal Consumer Financial Protection Bureau (CFPB) recently announced that it’s going to keep a close eye on payday lenders that issue small loans to military servicemembers and their families. As part of its efforts to protect servicemembers from payday lending scams and abuses, it released updated guidelines for its examiners who are tasked with investigating and supervising payday lenders.
Payday Loans: A Bad Deal for Everyone
A traditional payday loan works like this: Either you give the lender a check and get back an amount of money less than the face value of the check, or you sign an agreement giving the lender the right to withdraw money from your bank account. But laws targeting payday loans typically cover any short-term loan for a small amount of money.
The payday loan industry is notorious for charging exorbitant interest rates, often upwards of 200% to 500%. It also gets customers to roll over loans – basically renewing the loan by paying the finance charge. This results in hundreds of dollars in fees with no reduction in the loan amount, and customers get trapped into the loan treadmill.
(To learn more, see Nolo’s article Reasons to Avoid Payday Loans.)
Payday Loans Targeting the Military
Short-term small-dollar lenders have been targeting military bases for years. Because of this, in 2007 Congress passed legislation regulating the payday loan industry when dealing with active duty servicemembers (the law is called the Military Lending Act, and its provision apply to more than just payday loans). Among other things, the law put a cap on interest rates (to 36%) and banned rolling over loans (unless the new terms of the loan are favorable to the servicemember).
Some states have also enacted laws that restrict payday lending activities.
CFPB Examiners to Get More Guidance When Supervising Payday Lenders
In 2012, Congress gave the CFPB the authority to regulate the payday loan industry. And, at least according to the recent press release, it appears that the CFPB is serious about enforcing the law. Its new manual provides examiners with specific guidance on what to look for when gathering information from lenders that provide short-term, small-dollar loans to servicemembers. According to the CFPB, the examiners will:
- evaluate lender’s policies and procedures
- determine if they are in compliance with the law, and
- identify problems and risks for consumers throughout the lending process.
If you are struggling under a mound of debt, before resorting to a payday loan, visit Nolo’s Debt Management Center to learn about other options.