The long-awaited rules from the Consumer Financial Protection Bureau would require lenders in most cases to assess whether a consumer can repay the loan.
“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” said Richard Cordray, the bureau’s director. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”
The bureau has been overseeing the $38.5 billion-a-year payday lending industry since 2012, the first such federal oversight.
The centerpiece of the new rules is a full-payment test that lenders would be required to conduct to make sure the borrower could afford to pay off the loan and still meet basic living expenses and major financial obligations, the bureau said.
The rules limit the number of loans that could be made in quick succession to a specific borrower to three.
Consumers would be allowed to take out a short-term loan of as much as $500 without a full repayment test if the loan is structured to allow the borrower to get out of debt more gradually, such as allowing for payments to go directly to principal. Such loans could not be offered to borrowers with recent or outstanding short-term or balloon-payment loans.
The rules won’t go into effect until mid-2019 and are strongly opposed by most Republicans. The five-year term of Cordray, who was appointed by President Barack Obama, expires in July 2018, and he could leave sooner to run for governor in his home state of Ohio.
President Donald Trump would nominate a replacement who could move to rescind the rules before they ever go into effect.
Payday and other short-term loans, such as those secured with an automobile’s title, have been a fixture in lower-income and working-class communities for years. Their use surged during the Great Recession and its aftermath as struggling consumers looked for quick infusions of cash to pay bills.
The loans are available online or at an estimated 21,000 storefront locations nationwide, usually as cash advances on a worker’s paycheck. The loans typically are for two to four weeks and carry a flat 15 percent fee or an interest rate that doesn’t sound particularly high.
But costs can quickly add up if the loan isn’t paid off.
Consumer advocates and public interest groups have criticized payday lenders as taking advantage of cash-strapped Americans. A 2015 consumer bureau analysis of 12 million payday loans found that 22 percent of borrowers renewed their loans at least six times, leading to total fees that amounted to more than the size of the initial loan.
Last year, the bureau proposed rules that would limit the number of payday loans a consumer could take out each year, change how lenders collect payments and require them to more thoroughly review borrowers’ finances to make sure they can afford to repay the money.