Payday lenders would face a new set of restrictions under rules being proposed Thursday by the Consumer Financial Protection Bureau. The rules include requirements that lenders ensure borrowers have the ability to repay the loans, and limits to the number of times consumers can renew the loans. The proposal covers a wide set of short-term, high-cost lending products, including title loans. President Obama is expected to call for stronger payday loan rules in a speech on Thursday.
“Many lenders make loans based not on the consumer’s ability to repay but on the lender’s ability to collect,” CFPB Director Richard Cordray said. “Our research and analysis indicates that when loans are made on ability to collect, consumers are put at serious risk.”
The proposed federal rules are sure to generate controversy; payday lenders say state laws already heavily regulate their product.
Cordray described the new rules as an “outline” during an event in Alabama and said the bureau is open to feedback from lenders and consumer groups. The rules will first be reviewed by a Small Business Review Panel, and then be subjected to public comment before they are finalized.
One set of proposed rules would cover short-term loans that are 45 days or less; a second, similar set covers longer-term loans with interest rates higher than 36%, and where the lender has direct access to a bank account or a car title.
Lenders are offered one of two options, described as “debt trap prevention” or “debt trap protection.”
The “prevention” rule would require lenders to conduct underwriting when issuing loans to ensure consumers can pay them back while also paying for basic living expenses. Consumers who renewed their payday loan would have to be re-evaluated. And in cases where consumers take three loans in quick succession, a 60-day cooling off period would apply before that consumer could borrow again.
The “protection” rule would require lenders to decrease the principal amount for subsequent payday loans until the debt is paid off. Or, lenders would have to offer a no-cost extended payment plan to consumers who can’t pay off the loans.
The rules for longer-term loans would cap interest rates at 28% and repayment periods at six months or limit monthly payments to 5% of a consumer’s gross monthly income.
The new rules would also require lenders to notify consumers three days in advance that they will withdraw money from deposit accounts for repayment. And it would limit lenders to two unsuccessful attempts at such withdrawals to prevent consumers from being hit by cascading overdraft fees.
“The goal behind these parts of our proposal is to block lenders from harming consumers by abusing their preferential access to the consumers’ accounts,” Cordray said. “Of course, lenders that are owed money are entitled to get paid back. But consumers should be able to maintain some meaningful control over their financial affairs, and they should not be subject to an array of fees and other costs that can be generated entirely at the whim of the lender.”
The $50 billion payday lending industry is likely to fight many of the proposals.
“The bureau is looking at things through the lens of one-size fits all,” Dennis Shaul, CEO of the Community Financial Services Association of America, a trade association representing the payday lending industry, told the Associated Press.
But Cordray says the bureau has spent years studying the issue and, given that half of all payday loans are currently renewed before they are repaid, deems that new rules are necessary.
“In the end, we intend for consumers to have a marketplace that works both for short-term and longer-term credit products. For lenders that sincerely intend to offer responsible options for consumers who need such credit to deal with emergency situations, we are making conscious efforts to keep those options available,” he said. “But lenders that rely on piling up fees and profits from ensnaring people in long-term debt traps would have to change their business models.”
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Bob Sullivan is author of the New York Times best-sellers Gotcha Capitalism and Stop Getting Ripped Off. His stories have appeared in The New York Times, the Wall Street Journal, and hundreds of other publications. He has appeared as a consumer advocate and technology expert numerous times on NBC's TODAY show, NBC Nightly News, CNBC, NPR's Marketplace, Terry Gross' Fresh Air, and various other radio and TV outlets. He helped start MSNBC.com and wrote there for nearly 20 years, most of it penning the consumer advocacy column The Red Tape Chronicles. See more at www.bobsullivan.net. Follow Bob Sullivan on Facebook or Twitter. More by Bob Sullivan