Payday loans face government crackdown

New federal rules cracking down on unfair payday loans and other forms of predatory lending may be on the way. The proposals would target both short-term and longer-term loan products that are typically marketed toward financially vulnerable consumers. 

A sweeping new set of federal rules cracking down on unfair payday loans and other forms of predatory lending may be on the way.

The Consumer Finance Protection Bureau on Thursday announced it is considering regulations that would end “payday debt traps” by requiring lenders to make sure consumers can repay their loans and restricting them from collecting on loans in ways that tend to rack up more debt.

“Today we are taking an important step toward ending the debt traps that plague millions of consumers across the country,” CFPB Director Richard Cordray said in a news release. “Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.”

The proposals under consideration target both short-term and longer-term products that are typically marketed toward “financially vulnerable” consumers. Defenders of payday loans often say that, while their rates are dramatically higher than those of more mainstream loans, they service customers who wouldn’t be approved for loans any other way.

“The CFPB recognizes consumers’ need for affordable credit but is concerned that the practices often associated with these products – such as failure to underwrite for affordable payments, repeatedly rolling over or refinancing loans, holding a security interest in a vehicle as collateral, accessing the consumer’s account for repayment, and performing costly withdrawal attempts – can trap consumers in debt,” the news release reads. “These debt traps also can leave consumers vulnerable to deposit account fees and closures, vehicle repossession, and other financial difficulties.”

The new rules that will be on the table include:

• Requiring lenders to make sure borrowers can afford to repay high-risk loans by verifying income, major financial obligations and other factors before granting the loans
• Requiring a 60-day “cooling off” period between high-risk loans unless the borrower shows improved ability to pay
• Capping the number of rollovers allowed on what were intended to be short-term loans (defined as loan periods of 45 days or less)
• Creating an “off ramp” for borrowers, allowing them to pay off high-risk loans with no additional fees after a certain amount of time
• Requiring lenders to give borrowers three days’ notice before submitting a transaction, like an automatic withdrawal, to their bank or other accounts
• Limiting the number of unsuccessful withdrawal attempts a lender could make, thus cutting down on overdraft fees

Thursday’s announcement was the beginning of what could be a lengthy process before any, or all, of the proposals become the law of the land.

The bureau will be convening a Small Business Review Panel, which it says it will seek input from small lending institutions.

It will also seek feedback from other stakeholders and, once an official set of regulations is proposed, the public will be invited to submit written comments which will be considered before any new rules are issued.

Doug Gross is a staff writer covering personal finance for NerdWallet. Follow him on Twitter@doug_gross and on Google+