Claiming that American consumers have been “set up to fail” by the short-term lending industry, federal regulators on Thursday released sweeping new rules that would dramatically change the payday lending and securities lending industries.
Under the rule proposed by the Bureau of Consumer Financial Protection, short-term lenders would have to check borrowers’ ability to repay loans quickly and would not be allowed to issue loans repeatedly to the same consumers.
“The Office of Consumer Affairs has strong protections to end the payday debt traps,” CFPB Director Richard Cordray said. “Too many borrowers looking for a short-term cash flow solution are struggling with loans they cannot afford and are sinking into the lurch.long term debt. It’s a bit like getting in a cab just to cross town and get stuck on a journey through the ruinous country. By putting in place traditional lending standards and common sense, our proposal would prevent lenders from succeeding by causing borrowers to fail. “
The CFPB studied the short-term lending industry for several years, so the new rules were expected.
The repayment capacity provision would require lenders to verify a borrower’s after-tax income, government benefits or other sources of income, and ensure that the borrower can make timely loan repayments while being able to afford basic necessities such as food and shelter. Lenders would also be required to check a consumer’s credit report to verify the amount of other outstanding loans and required payments. (You can get a free credit report summary at Credit.com to see where you stand.)
The new rules also include provisions designed to prevent consumers from facing drastic fees, such as repeated attempts to collect debts on depleted checking accounts.
“After two consecutive unsuccessful attempts, the lender would be prohibited from debiting (a borrower’s) account again, unless the lender obtains a new specific authorization from the borrower,” CFPB said.
The proposal would also cap the number of short-term loans that can be made quickly. CFPB research has shown that although payday loans are designed for the short term, many borrowers simply renew their loans when payment is due. A CFPB study found that 80% of payday borrowers took out another loan within 30 days.
Alerting industry critics that regulation of the convenience market would prevent consumers from obtaining short-term credit, the bureau attempted to strike a balance, leaving some lending opportunities open.
Under the proposed rule, consumers will be allowed to borrow a short-term loan of up to $ 500 without passing the “full payment test”, as long as they have not used short-term loans for. more than 90 days in the previous year and the loan is not secured by a car title. Short-term low-interest loans – with a total cost of borrowing 36% interest or less – will also be permitted under certain circumstances.
Consumer groups have enthusiastically welcomed the CFPB rules.
“Since the inception of CFPB, the Bureau has worked diligently to understand the breakdown and auto titles market, examine the consumer experience, and develop targeted, data-driven interventions to prevent harmful practices,” said Tom Feltner, director of financial services at the Consumers’ Federation. from America.
Industry groups have warned, however, that the regulation of short-term loans could force Americans to look to even less attractive alternatives.
“The Bureau continues to miss the mark for millions of Americans struggling to make ends meet and effectively forces most banks to sit on the sidelines due to a greater compliance burden,” said Richard Hunt, President and CEO of the Consumer Bankers Association. “Consumers across the country will now turn to pawn shops, overseas loans and underground entities that will cost them more. We will continue to work with the Bureau to develop products and services that are reasonable and meet the needs of consumers, ”
The public comment period on the new rules will begin shortly and run until September 14. The CFPB is expected to publish its final rule thereafter.
This article originally appeared on Credit.com.