Federal regulators will outline a proposal Thursday to place limits on high-interest, short-term loans — the first step in the government’s efforts to curb payday debt traps.
The long-awaited rules drafted by the Consumer Financial Protection Bureau would cover payday loans, vehicle title loans and high-cost installment loans. Lenders would have to make sure that borrowers can afford repayment and would have to notify them before debiting payments from their checking accounts.
The rules would also limit the number of loans that borrowers can take out and the number of times that lenders can try to withdraw money from accounts, a practice that the consumer bureau says often ends up burdening consumers with excessive fees.
The proposal will be announced Thursday at a public hearing in Richmond, Va., by Richard Cordray, the director of the bureau, a government watchdog with jurisdiction over small-dollar loans.
Also Thursday, President Barack Obama is scheduled to speak in Birmingham, Ala., about predatory lending practices that have long been considered a problem in Fort Worth and hundreds of communities nationwide.
The proposal marks an important step toward ending debt traps that plague millions of Americans, Cordray said in a statement.
“Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay,” Cordray said. “These common-sense protections are aimed at ensuring that consumers have access to credit that helps, not harms, them.”
Under the proposal, lenders would have a choice of whether to “prevent” debt traps or “protect” against debt traps.
To prevent debt traps at the outset of a loan, lenders would need to verify a person’s income, financial obligations and borrowing history. To protect after issuing a loan, lenders would limit how many times a borrower can take out a loan in a row over a year.
Lenders expressed alarm that the rules were too restrictive and would cut off access to credit for people in need of emergency cash.
“At a time when consumers are demanding choices for flexible, responsible credit products, we’re very concerned that this initial proposal could severely restrict their options,” Lisa McGreevy, president and CEO of the Online Lenders Alliance, said in a statement.
Payday loans are a $45 billion industry that serves more than than 19 million households a year, according to the Community Financial Services Association of America, a trade group for short-term credit products.
Any new rules should balance consumer protections with the need to preserve consumers’ access to credit, CEO Dennis Shaul said in a statement.
The consumer bureau should also consider the negative effect on lenders that are small businesses, Shaul said.
The Star-Telegram recently published The Debt Trap, a series about the perils of payday and other short-term loans.
Consumer advocates hailed the proposal for its potential to make payday and other small loans safer for consumers. But they expressed concern that “loopholes” might allow some unaffordable loans to stay on the market.
For example, the rules would allow up to three back-to-back payday loans and up to six payday loans a year, said Lauren Saunders, associate director of the National Consumer Law Center.
Triple-digit, six-month-installment loans would also be permitted as long as payments were limited to 5 percent of the borrower’s gross income, regardless of expenses or debts.
“That is a dangerous approach that blesses unaffordable high-rate loans,” Saunders said in a statement.
“Looking only at income ignores key elements to evaluate affordability: the borrowers’ expenses and how the loans perform in practice,” she said.
It’s also not enough for lenders to evaluate consumers’ ability to pay at the outset of a loan, Saunders said.
“Any business looks at how its loans perform overall, and the [consumer bureau] should do the same,” she said. “A lender that makes triple-digit loans with high default rates, high numbers of bounced payments, or other indicators of unaffordability should not get a pass.”
Obama is expected to highlight predatory lending practices in a speech at Lawson State Community College in Birmingham, Ala., Thursday, The Birmingham News reported.
The White House would not confirm the content of the president’s remarks, but a spokesman did defend the consumer bureau.
Asked whether Obama’s trip risked politicizing the supposedly independent agency, White House press secretary Josh Earnest said the president has long supported the bureau’s efforts.
“But, ultimately, Richard Cordray and the [bureau] is responsible for doing what they think is best, not what the president thinks is best,” he said.
Financial news services reported late Wednesday that stocks of payday loan companies were hammered on news of the regulations.
Fort Worth-based Cash America International is considered a major player in the payday loan industry, but it has downsized that part of its business for years.
Staff writer John Gravois contributed to this report.