Payday loans face government crackdown
A sweeping new set of federal rules cracking down on unfair payday loans and other forms of predatory lending may be on the way.
The Consumer Finance Protection Bureau on Thursday announced it is considering regulations that would end 鈥減ayday debt traps鈥� by requiring lenders to make sure consumers can repay their loans and restricting them from collecting on loans in ways that tend to rack up more debt.
鈥淭oday we are taking an important step toward ending the debt traps that plague millions of consumers across the country,鈥� CFPB Director Richard Cordray said in a news release. 鈥淭oo many short-term and longer-term loans are made based on a lender鈥檚 ability to collect and not on a borrower鈥檚 ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.鈥�
The proposals under consideration target both short-term and longer-term products that are typically marketed toward 鈥渇inancially vulnerable鈥� consumers. Defenders of payday loans often say that, while their rates are dramatically higher than those of more mainstream loans, they service customers who wouldn鈥檛 be approved for loans any other way.
鈥淭he CFPB recognizes consumers鈥� need for affordable credit but is concerned that the practices often associated with these products 鈥� such as failure to underwrite for affordable payments, repeatedly rolling over or refinancing loans, holding a security interest in a vehicle as collateral, accessing the consumer鈥檚 account for repayment, and performing costly withdrawal attempts 鈥� can trap consumers in debt,鈥� the news release reads. 鈥淭hese debt traps also can leave consumers vulnerable to deposit account fees and closures, vehicle repossession, and other financial difficulties.鈥�
The new rules that will be on the table include:
- Requiring lenders to make sure borrowers can afford to repay high-risk loans by verifying income, major financial obligations and other factors before granting the loans
- Requiring a 60-day 鈥渃ooling off鈥� period between high-risk loans unless the borrower shows improved ability to pay
- Capping the number of rollovers allowed on what were intended to be short-term loans (defined as loan periods of 45 days or less)
- Creating an 鈥渙ff ramp鈥� for borrowers, allowing them to pay off high-risk loans with no additional fees after a certain amount of time
- Requiring lenders to give borrowers three days鈥� notice before submitting a transaction, like an automatic withdrawal, to their bank or other accounts
- Limiting the number of unsuccessful withdrawal attempts a lender could make, thus cutting down on overdraft fees
Thursday鈥檚 announcement was the beginning of what could be a lengthy process before any, or all, of the proposals become the law of the land.
The bureau will be convening a Small Business Review Panel, which it says it will seek input from small lending institutions.
It will also seek feedback from other stakeholders and, once an official set of regulations is聽proposed, the public will be invited to submit written comments which will be considered before any new rules are issued.
Doug Gross is a staff writer covering personal finance for聽. Follow him on Twitter聽and on聽
