New rules proposed for payday loans

Federal consumer watchdog wants to limit quick-cash lenders


The nation's consumer financial protection cop unveiled new restrictions for payday loans and other forms of short-term credit, in a move to stop emergency loans from turning into debt traps.

The U.S. Consumer Financial Protection Bureau held a public hearing Thursday as a backdrop for its proposals, which include limits on loan rollovers, freezes on new loans and limits on how lenders tap borrowers' bank accounts. The proposals apply to auto title loans, deposit advances and high-rate installment loans as well as payday loans

"Consumers should be able to use these products without worrying that they will end up stuck in a deep hole with no way out," CFPB Director Richard Cordray said at the hearing in Richmond, Virginia. President Obama applaunded the payday restrictions in a speech Thursday in Birmingham, Alabama, saying lenders that profit by setting debt traps "need to find a new way of doing business."

Payday loans common
Between 12 million and 19 million U.S. households use the short-term loans at least once a year, estimates say, from strip-mall storefronts or online payday lenders. A typical $300 payday loan costs $45 and lasts about two weeks, for an annualized interest rate of more than 300 percent.

"I started out with a $300 loan from LoanMax title loan," Richmond-area resident Kia Johnson said at the CFPB hearing. "Over a period of time they took the vehicle, and I have received a letter saying I have a $5,000 and some balance."

The proposals for broad restrictions address a top concern of consumer advocates. With their high interest rates and a pipeline into your next paycheck, payday loans and other costly forms of credit sap resources from entire communities of cash-strapped households, opponents say.

"Payday loans are one of the worst predatory loan products on the market today," said Lauren Saunders, managing attorney at the National Consumer Law Center.

A 2013 study by the CFPB found that 13 percent of payday borrowers studied were able to limit their trips to the well to one or two visits per year. However, another 48 percent of borrowers took out more than 10 payday loans a year. These repeat borrowers generated three-quarters of total fees, showing that cyclic debt is important to the payday loan industry's financial structure.

"If you have a regular gap between your income and expenses, taking on debt is not the answer," Saunders said.

Two-step approach
The CFPB outlined a two-step approach Thursday that would let lenders either prevent debt traps or protect consumers from getting hooked on expensive credit. The proposal for short-term credit applies to loans due within 45 days, including some auto title loans, deposit advances and open-ended lines of credit as well as payday loans.

Option one: For short-term loans under $500, lenders would cap rollovers at two, after which a 60-day freeze on new borrowing would take effect. The two rollovers would be permitted only if the lender provides a low-cost "off-ramp" out of debt, such as allowing the balance to be repaid over time without new fees. The consumer bureau is still considering what options should be available for eliminating debt.

Option two: For short-term loans over $500, lenders would have to verify borrowers' income, expenses and repayment history to determine their ability to repay. A 60-day freeze on new loans would apply generally, with exceptions for borrowers whose financial condition improved.

Whatever form the rules take must balance consumer protection with access to emergency credit, payday lending proponents said.

Payday loans represent an important source of credit for millions of Americans who live from paycheck to paycheck.

-- Dennis Shaul
Community Financial Services Association of America

"Payday loans represent an important source of credit for millions of Americans who live from paycheck to paycheck," said Dennis Shaul, CEO of the payday lender group Community Financial Services Association of America. The consumer bureau's proposals would result in hundreds of small lenders closing, cutting consumers off from emergency credit, he said.

"The concern should be protecting the consumer, but also making credit available to them," Shaul said.

Emergency cash source
As a one-time stopgap, even a high-cost loan can be better than getting the electricity shut off or overdrawing your checking account. Federal Reserve research has found that storefront lenders provide quick access to cash in an emergency for people whose credit leaves them few other options.

For longer-term loans with a payback period of 45 days to six months, the CFPB outlined another two-option proposal. Under the first option, lenders would have to determine the borrower's ability to repay by verifying income, expenses and borrowing history. Alternatively, the lender could offer terms with the same protections as "payday alternative loans" offered under a program from the National Credit Union Administration. These have a 28 percent cap on interest rates, an application fee cap of $20, and monthly payment caps set at 5 percent of the borrower's income.

"A lot of people struggle to make ends meet, but high-cost lending is not the answer," Saunders said.

The rules would also set limits on lenders' access to borrowers' bank accounts. Lenders would have to give three business days' notice before tapping borrowers' bank accounts or prepaid accounts. And after two unsuccessful withdrawal attempts, lenders would have to stop making further collection attempts, limiting the fees that banks impose on borrowers for attempted transactions.

A lot of people struggle to make ends meet, but high-cost lending is not the answer.

-- Lauren Saunders
National Consumer Law Center

"We think it's important a borrower has the ability to choose what to pay back, and when," said Courtney Eccles, policy initiative leader at the anti-poverty Woodstock Institute.

One thing the CFPB can't do is cap interest rates, a power that is left to the states. According to a January 2014 research report by Pew Charitable Trusts, 15 states restrict payday loan rates tightly, while nine set some limits and 27 do not cap interest charges. The CFPB rules will bring new protections in states with little regulation, without diluting protections already in place in restrictive states.

In 2014, for example, New York's attorney general cracked down on online payday loan operations that violated the state's 16 percent interest rate cap, which effectively prohibits payday lending within the state.

Earlier story: Feds crack down on payday loans, deposit advances 

Updated: March 26, 2015

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