New CFPB Payday Loan Rules Will Protect Consumers From Risky Financial Products

Federal regulators plan to launch a near-killing blow to the payday loan industry. New rules proposed by the Consumer Financial Protection Bureau will impose a complicated set of guidelines meant to protect consumers from high-interest, low-dollar loans, but may put many lenders in jeopardy.

Speaking to reporters on Wednesday, CFPB Director Richard Cordray explained why government intervention is needed in the payday loan industry.

“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt. It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”

At 1,334 pages, the proposal affects mostly storefront lenders that loan money to low-income households. If the new CFPB payday loan rules become final, lenders will need to toughen underwriting standards through a stringent assessment of a borrower’s credit and ability to repay the loan. Other restrictions make it harder to roll previous loans into a new loan and limit fees coming out of a borrower’s bank account.

The CFPB plans to add even more constraints to the payday loan industry. According to the payday rules announcement, the agency has initiated a review of “other potentially high-risk loan products and practices” to identify any dicey lending instruments not falling under the proposed measure.

Just last month, the CFPB enacted a measure that prohibits mandatory arbitration, essentially clearing the way for consumers to file class-action lawsuits against financial companies. Since Congress did not give the agency the power to regulate interest rates or outright ban small-dollar loans, the CFPB has to find other ways to curb the industry’s lending procedures.

Payday companies believe the stricter regulations will put many out of business, essentially leaving many borrowers without an option for alternative credit. According to Dennis Shaul, the chief executive of the Community Financial Services Association of America, the CFPB was ordered by Congress in 2010 to “regulate payday, not annihilate it.”

Typically not qualified at traditional banks, borrowers take out short-term loans of a few hundred dollars at interest rates as high as 300 percent. Opponents of the rules contend the new limits will only hurt borrowers. A survey earlier this year by Bankrate.com revealed less than 40 percent of Americans, many of whom make less than $30,000 annually, have enough savings to cover even a small car repair or hospital bill.

“We recognize that consumers may need to borrow money to meet unexpected drops in income or unexpected expenses,” Cordray said. “We recognize too that some lenders serving this market are committed to making loans that consumers can in fact afford to repay.”

Even some supporters of the rules criticized the CFPB for going too far. They argue the complications and restrictions built into the measure keep many traditional banks and financial institutions from offering small-loan products.

The proposed agency rule is the second disappointment for the payday loan industry this year. As previously reported by the Inquisitr, Google banned payday loan ads from its search engine starting this summer.

The CFPB wants to completely revamp the $38.5 billion payday loan market, an industry that has been mostly regulated through state financial departments. The agency included vehicle title loans and certain other precarious installment loans in the new proposal.

In addition to the payday loan rules, the agency has plans to announce new proposals aimed at prepaid cards, bank overdraft fees, and debt collection within the next few months. Since its establishment five years ago, the CFPB has focused primarily on mortgage and credit card products.

Now, however, the agency is being accused of stretching its authority into areas not originally mandated by Congress. This suspected overreach is creating friction with the industry and has prompted several lawsuits and legal challenges. Many Republicans have promised to reverse many of the regulations should they win in November’s elections.

While not yet finalized, the new payday loan rules will be announced by the CFPB at a meeting in Kansas City, Missouri, on Thursday. Once the proposal goes through a 90-day public comment period, an official implementation will likely happen in early 2017.

[Photo by Dan Kitwood/Getty Images]