The US government revealed plans on managing the $38.5bn payday loans industry, to protect customers more.
The low-dollar, high interest rate loans have been regulated in different ways in each state individually, until now. The new rule being introduced by the US government will make lenders verify the income of those applying for a loan, to make sure they can repay the money in the time given.
According to the Pew Charitable Trusts, almost 12 million people who live in America use payday loans each year, and many of these people end up becoming trapped in spiralling debt.
In 2015, after a proposal by the Consumer Financial Protection Bureau (CFPB) to regulate the industry, the Pew Charitable Trusts carried out a survey on over 1,000 adults. This survey showed that 75 per cent want greater regulation of the industry, and over 78 per cent of those who were surveyed want credit unions and banks to offer a small loan with low interest rates compared to payday lenders.
The CFPB was established by the Dodd-Frank Act, which is the same law that allows the authority to manage the payday loans industry. However, the Republicans have questioned whether the CFPB are able to regulate services/products like auto loans and payday loans as the state regulations clash with the rules of CFPB.
Randy Neugebauer, a Republican congressman, said to the CFPB director, Richard Cordray: “At issue are roughly 38 states that allow these products to be offered in some form and the federal pre-emption that will occur if your rule goes forward as outlined.”