Norman Chen
Article Summary

The Dodd-Frank Reform was passed in 2010. The purpose of this legislation is to change risky lending practices. One of the causes of the 2007 financial crisis was the high volume of high risk loans that were being bought and sold by financial institutions. The Dodd-Frank Reform would prevent financial institutions from issuing predatory and high risk loans.
Richard Cordray was appointed by President Obama while Congress was in Winter 2011-2012 recess. The reason for this unorthodox appointment is that the Republican Representatives are against regulations and would not have passed the appointment.
Richard Cordray will focus on the following provision in the Dodd-Frank Reform: “Consumer Protections with Authority and Independence: Creates a new independent watchdog, housed at the Federal Reserve, with the authority to ensure American consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other financial products, and protect them from hidden fees, abusive terms, and deceptive practices.” Richard Cordary will target Payday loans first.
Payday loans are short term loans that are secured by a future paycheck. The banks typically charge $10 per $100 borrowed for 10 days or 10% every 10 days. The banks claim that this high rate is justified because of the high risk clients.
The actual default rate is between 3 and 4 percent. This is because Customers must have checking accounts and must have their pay or benefits check directly deposited into that account. The maximum loan term is 30 days and the maximum loan amount is usually $500. If the direct deposits are not sufficient to repay the loan within 35 days, the bank withdraws the money from the customer’s account even if it overdraws the account, which will also trigger more fees that the borrower must pay.
The problem is that customers find themselves in a vicious cycle where they take out a loan to pay for a current expenditure. Then when their paycheck is used to pay off the first loan, a new payday loan is needed to pay the new bills.