Lenders who offer payday loans and other small cash advances should assess whether borrowers can afford and repay the debts, according to a federal rule proposed Thursday.
The long awaited Proposal from the Consumer Financial Protection Bureau Would also reduce repeated debit attempts that hit delinquent borrowers with additional fees and charges as lenders demand repayment.
The regulator has also launched an investigation into other high-risk loans and practices not covered by the new proposal, including open-ended lines of credit and the methods lenders can use to foreclose wages, vehicles or d other personal property of borrowers.
The rule proposal followed a CFPB 2014 study who found that about 62% of all payday loans – often due within two weeks and carrying an annual interest rate of around 390% – go to consumers who repeatedly extend their repayments and ultimately owe more more fees than they originally borrowed.
Half of borrowers who got similar high-interest loans online later were hit with an average of $ 185 in bank overdraft and insufficient fund charges, another CFPB analysis found this year.
More than 80% of auto title loans, transactions in which consumers give their vehicles as collateral, are rolled over or extended to the day they are due because borrowers cannot afford to pay them in full, also found the CFPB.
“Too many borrowers looking for a short-term cash flow solution are struggling with loans they cannot afford and are falling into long-term debt,” CFPB Director Richard Cordray said in a statement released ahead of a hearing scheduled for Thursday on the matter. ” , common sense lending standards, our proposal would prevent lenders from succeeding by failing borrowers. “
A coalition of religious and community leaders were planning to gather on Thursday and urge the CFPB to enact the rule. Representatives of the payday loan industry held a press conference ahead of the hearing. Noting that millions of Americans live paycheck to paycheck, Consumer Bankers Association CEO Richard Hunt said the proposal could send consumers “to pawn shops, loans overseas. and clandestine entities which will be more costly ”.
“The rule proposed by the CFPB deals a terrible blow to consumers because it will cut off access to credit for millions of Americans who use small loans to manage a budget deficit or unforeseen expenses,” said Dennis Shaul, CEO of the Community Financial Services Association. from America. “It also sets a dangerous precedent for federal agencies developing regulations that impact consumers.”
The proposed rule, open for public comment until September 14, includes:
- A full payment test that would force lenders to determine if borrowers can afford to make each repayment on time while still covering basic living expenses.
- A provision that would allow consumers to borrow a short-term loan of up to $ 500 without requiring a full repayment test. Lenders could not offer the option to consumers with current short term or lump sum loans.
- One option for lenders to offer two longer term loan options with more flexible underwriting if the paths are less risky.
Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc