Payday lenders to face new federal regulations

Payday lenders would face federal rules aimed at protecting low-income borrowers from being buried by fees and debts under proposals being unveiled Thursday by the Consumer Financial Protection Bureau.

President Barack Obama welcomed the move, and he warned Republicans that he would veto attempts to unravel regulations that govern the financial industry.

Borrowers who struggle to get by have increasingly relied on storefront and online lenders. The federal government is aiming to set standards for a multibillion-dollar industry that has historically been regulated only at the state level.

Payday loans provide cash to borrowers who run out of money between paychecks. The loans, which typically come due within two weeks, carry high interest rates. Because many borrowers struggle to repay, the loans’ compounded fees can become overwhelming. Delinquent borrowers sometimes lose their bank accounts and their cars – and even risk prison time.

The regulations being unveiled are intended to ensure that the payday loans can be repaid.

“Extending credit to people in a way that sets them up to fail and ensnares considerable numbers of them in extended debt traps is simply not responsible lending,” CFPB director Richard Cordray said in remarks prepared for a hearing Thursday in Richmond, Va.

The proposed rules would apply not only to payday loans but also to vehicle title loans – in which a car is used as collateral – and other forms of high-cost lending.

Before extending a loan due within 45 days, lenders would need to ensure that consumers could repay the entire debt on schedule. Incomes, borrowing history and other financial obligations would need to be verified to show that borrowers are unlikely to default or roll over the loan.

In general, there would be a 60-day “cooling off period” between loans and lenders would need to provide “affordable repayment options.” Loans could not exceed $500, have multiple finance charges or require a car as collateral.

The CFPB outlined a similar set of proposed rules to regulate longer-term, high-cost loans with payback terms ranging between 45 days and six months. These proposed rules also include the possibility of either capping interest rates or repayments as a share of income.

The rules will be reviewed by a panel of small business representatives and other stakeholders before the bureau formalizes the proposals for public comments and then finalizes them.

The payday loan industry warns that overly strict regulations could cut into the flow of credit for the Americans who need it most. The industry argues that the CFPB should continue to research the sector before setting additional rules.

“The bureau is looking at things through the lens of one-size fits all,” said Dennis Shaul, chief executive of the Community Financial Services Association of America.

The proposed regulations come after a 2013 CFPB analysis of payday lending. For an average $392 loan that lasts slightly more than two weeks, borrowers were paying in fees the equivalent of a 339 percent annual interest rate, according to the report. The median borrower earned less than $23,000 – beneath the poverty line for a family of four – and 80 percent of the loans were rolled over or renewed, causing the fees to further build.

Over the course of 12 months, nearly half of all payday borrowers had more than 10 transactions, meaning they either rolled over existing loans or borrowed again.

Several states have attempted to curb payday lending. Washington and Delaware limit how many loans a borrower can take out each year, while Arizona and Montana have capped the annual interest rates, according to a 2013 report by the Center for Responsible Lending.

Industry representatives said states are better set up to regulate the industry, ensuring that consumers can be protected while lenders can also experiment with new loan products.

This story was originally published March 26, 2015 at 4:29 PM with the headline "Payday lenders to face new federal regulations."