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New proposed payday regulations could affect how you manage your in-house auto financing
The average American family isn’t financially prepared for a large, unexpected expense. The Federal Reserve Board found that 46 percent of individuals believe that they would struggle to pay for emergency expenses of $400. If you own or work for a Buy Here Pay Here (BHPH) auto dealership, you probably meet buyers in this predicament every single day.
You provide a valuable service for people who need reliable vehicles to drive to work, bring the kids to school, and lead successful lives. There are some dealerships and businesses, however, that take advantage of lower income, higher risk individuals by charging astronomical interest rates. To combat this, the Consumer Financial Protection Bureau (CFPB) has proposed a rule that would institute payday regulations covering payday loans, auto title loans, deposit advance products, and certain installment and open-ended loans. The CFPB is concerned that too many consumers are taking on loans they cannot afford and plunging into long-term debt.
New Payday regulations you need to be aware of
The CFPB payday regulations proposal takes aim at companies that set consumers up to fail from the very beginning. Under the proposal, a few different protections are recommended:
Full-payment test
Lenders would have to figure out if a borrower would be able to afford their full monthly payment on each due date, while still being able to purchase necessary living expenses and other financial obligations. The definition of “full payment” varies depending on the type of loan.
Principal payoff for short-term loans
For short-term loans up to $500, consumers could be eligible for a principal payoff option instead of the full payment test.
Longer-term options with less risk
Lenders could offer two longer-term loan options, but only if they pose less risk. Specific parameters would apply, depending on the situation.
Notice to cut off debit
Lenders would be required to give consumers written notice before they attempt to debit an account to collect payment. Two consecutive unsuccessful attempts would prohibit the lender from debiting the account again without a new authorization from the consumer. This prevents the consumer from incurring massive fees from both the bank and the lender.
Currently, this proposal is open for public comment until September 14, 2016. After that, the CFPB will move forward with a final rule if they “conclude that its proposed solution will accomplish the goals or solve the problems identified.”
Why are these payday regulations being discussed?
Payday loans and other types of short-term, high-interest loans may get a lot of grief, but for many people, they are real lifesavers. Traditional banks are not able to adequately serve millions of U.S. households and because of that, more than 16 million households take out at least one payday loan every year.
Unfortunately, many businesses put profits ahead of people and charge unreasonable interest rates — some as high as 400 percent! — and make a bad name for other companies that try to do the right thing.
As an honest, upstanding auto dealership, these rules (if finalized) should not have a huge impact on how you do business. They will, however, protect the individuals you do business with not just at your dealership, but in other types of loan situations in which they may get involved. The way it stands now, payday regulations don’t ensure consumers can afford their monthly payments or protect them from huge fees. One-in-five payday loans end up in default, leaving consumers in financial situations become even more dire.
How the proposed payday regulations could affect your dealership
The proposed regulations affect lenders, so if you own a BHPH dealership, or your used car dealership provides in-house financing, pay attention to what happens with the CFPB rule and whether or not it is finalized. If your dealership is already on the up-and-up, you shouldn’t need to make any significant changes.
The CFPB’s proposal covers two categories of loans, and your dealership will likely fall into the second category (if any):
- Loans with a term of 45 days of less
- Loans with a term greater than 45 days, provided that they have an all-in annual percentage rate greater than 36 percent, and are either repaid directly from the consumer’s account or income or are secured by the consumer’s vehicle.
Although the proposed payday regulations from the CFPB may not affect you this time around, stay aware of both state and federal laws to ensure your dealership’s lending practices are in full compliance. Some lawmakers are extremely committed to regulating high-interest lending practices, and any laws they pass are likely to impact BHPH dealerships and some other used car dealerships.
The best way to ensure your dealership is lending money legally is to always put the consumer first. Put yourself in their shoes, act in their best interest, and you can grow your dealership knowing that you are doing so as ethically as possible.
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