How the feds aim to protect consumers from payday loans

The Consumer Financial Protection Bureau, set up by President Obama after the financial crisis, has published proposals that seek to curb the debt-inducing aspects of payday loans and other high-interest lending products.

First Look

Federal regulators announced Thursday their proposals to clamp down on the controversial practice of payday lending and other short-term, high-interest loans.

In the pipeline for some time, the controls seek to address a practice that provides a service, lending typically small amounts of cash on a short-term basis, but at significant cost, often charging triple-digit interest rates and stacking up overdraft fees against the borrowers.

The proposals have been laid down by the Consumer Financial Protection Bureau (CFPB), which was set up by President Obama in response to the 2008 financial crisis, its aim being to protect consumers.

"Millions of Americans take out these loans every year," said Mr. Obama in a March 2015 weekly address. "But while payday loans might seem like easy money, folks often end up trapped in a cycle of debt. If you take out a $500 loan, it’s easy to wind up paying more than $1,000 in interest and fees."

The new regulations would tackle two fundamental aspects of payday loans.

First, they would require lenders to carry out a "full-payment test." This seeks to prevent the descent into a spiral of debt by forcing lenders to ensure that borrowers will be able to repay the loan, which is usually due only two weeks after the money is lent out.

Second, in an effort to reduce the amount of overdraft fees that can hammer the borrowers, there would be a limit on the number of times lenders can try to debit a borrower’s bank account, as well as a requirement for additional warnings before such attempts are made.

"Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt," said CFPB Director Richard Cordray in a statement.

Likening the situation to jumping in a taxi for a short ride across town and instead finding yourself trapped on a "ruinously expensive" journey across the country, Mr. Cordray said the aim was to "prevent lenders from succeeding by setting up borrowers to fail."

Consumer advocates have expressed mixed reactions, with some praising the proposals, but others saying they should go further. The Pew Charitable Trusts, for example, described the rules as missing a "historic opportunity," saying that they make it "too easy for payday lenders to continue making harmful loans."

In particular, Nick Bourke, director of Pew’s small-dollar loans project, lamented the high fees that will remain in place, as well as the lack of limits on the percentage of a borrower’s paycheck that can be demanded. But he conceded that the proposals nonetheless represented "a major improvement."

At the opposite end of the spectrum, the Community Financial Services Association of America, a trade group representing the payday lending industry, described the rules as a "staggering blow to consumers," saying that it would cut off credit access "for millions of Americans," and adding that it does nothing to address the issue of illegal lenders.

The proposals will likely face stiff opposition from lobbyists and affected industries, as well as from some members of Congress.

Comments are welcomed from interested parties and the general public until Sept. 14.

Last month, Google announced that it would no longer allow payday loan advertising, effective July 1, as The Christian Science Monitor reported. 

 

Google said it will ban certain types of payday loans, particularly ones that must be repaid within 60 days or with interest rates of 36 percent or higher, according to the announcement from David Graff, Google's director of product policy. It will become effective July 13. Although lenders will no longer to be able to advertise on the search engine, users will still be able to search for them.

This report contains material from the Associated Press.