Each month, more than 200,000 needy U.S. households take out what’s advertised as a brief loan. Many have run out of money between paychecks. So they obtain a “payday” loan to tide them over. Problem is, such loans can often bury them in fees and debts. Their bank accounts can be closed, their cars repossessed.
The Consumer Financial Protection Bureau proposed rules today to protect Americans from stumbling into what it calls a “debt trap.” At the heart of the plan is a requirement that payday lenders verify borrowers’ incomes before approving a loan.
The government is seeking to set standards for a multibillion-dollar industry that has historically been regulated only at the state level.
“The idea is pretty common sense: If you lend out money, you should first make sure that the borrower can afford to pay it back,” President Barack Obama said in remarks prepared for a speech in Birmingham, Alabama. “But if you’re making that profit by trapping hard-working Americans in a vicious cycle of debt, then you need to find a new way of doing business.”
The payday industry warns that if the rules are enacted, many impoverished Americans would lose access to any credit. The industry says the CFPB should further study the needs of borrowers before setting additional rules.
“The bureau is looking at things through the lens of one-size-fits-all,” argued Dennis Shaul, chief executive of the Community Financial Services Association of America, a trade group for companies that offer small-dollar short-term loans or payday advances.
Last year, Louisiana lawmakers rejected a bill that would have capped interest rates on payday loans at 36% and would have limited the number of such loans consumers can take out each year to 10.
Jan Moller, director of the Louisiana Budget Project—which has called for increased regulation of payday loans for years—has said he doesn’t anticipate the issue to be a focus of this year’s session, which begins April 13. Moller has estimated that 1,000 storefront payday lenders operate in Louisiana. His organization lists the annual percentage rate for a payday loan as 780%.
The Associated Press has the full story on the CFPB’s proposed rules.
