Home > News > Obama, CFPB Seek to Regulate Payday Loan “Debt Traps”

Comments 0 Comments

Payday lenders would face a new set of restrictions under rules being proposed Thursday by the Consumer Financial Protection Bureau. The rules include requirements that lenders ensure borrowers have the ability to repay the loans, and limits to the number of times consumers can renew the loans. The proposal covers a wide set of short-term, high-cost lending products, including title loans.

“Many lenders make loans based not on the consumer’s ability to repay but on the lender’s ability to collect,” CFPB Director Richard Cordray said. “Our research and analysis indicates that when loans are made on ability to collect, consumers are put at serious risk.”

The proposed federal rules are sure to generate controversy; payday lenders say state laws already heavily regulate their product.

Cordray described the new rules as an “outline” during an event in Alabama and said the bureau is open to feedback from lenders and consumer groups. The rules will first be reviewed by a Small Business Review Panel, and then be subjected to public comment before they are finalized.

President Barack Obama voiced his support for the proposal on Thursday.

“As Americans, we believe there’s nothing wrong with making a profit,” Obama said in statement given to reporters, according to USA Today. “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.”

One set of proposed rules would cover short-term loans that are 45 days or less; a second, similar set covers longer-term loans with interest rates higher than 36%, and where the lender has direct access to a bank account or a car title.

Lenders are offered one of two options, described as “debt trap prevention” or “debt trap protection.”

The “prevention” rule would require lenders to conduct underwriting when issuing loans to ensure consumers can pay them back while also paying for basic living expenses. Consumers who renewed their payday loan would have to be re-evaluated. And in cases where consumers take three loans in quick succession, a 60-day cooling off period would apply before that consumer could borrow again.

The “protection” rule would require lenders to decrease the principal amount for subsequent payday loans until the debt is paid off. Or, lenders would have to offer a no-cost extended payment plan to consumers who can’t pay off the loans.

The rules for longer-term loans would cap interest rates at 28% and repayment periods at six months or limit monthly payments to 5% of a consumer’s gross monthly income.

The new rules would also require lenders to notify consumers three days in advance that they will withdraw money from deposit accounts for repayment. And it would limit lenders to two unsuccessful attempts at such withdrawals to prevent consumers from being hit by cascading overdraft fees.

“The goal behind these parts of our proposal is to block lenders from harming consumers by abusing their preferential access to the consumers’ accounts,” Cordray said. “Of course, lenders that are owed money are entitled to get paid back. But consumers should be able to maintain some meaningful control over their financial affairs, and they should not be subject to an array of fees and other costs that can be generated entirely at the whim of the lender.”

The $50 billion payday lending industry is likely to fight many of the proposals.

“The bureau is looking at things through the lens of one-size fits all,” Dennis Shaul, CEO of the Community Financial Services Association of America, a trade association representing the payday lending industry, told the Associated Press.

But Cordray says the bureau has spent years studying the issue and, given that half of all payday loans are currently renewed before they are repaid, deems that new rules are necessary.

“In the end, we intend for consumers to have a marketplace that works both for short-term and longer-term credit products. For lenders that sincerely intend to offer responsible options for consumers who need such credit to deal with emergency situations, we are making conscious efforts to keep those options available,” he said. “But lenders that rely on piling up fees and profits from ensnaring people in long-term debt traps would have to change their business models.”

More Money-Saving Reads:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team