Payday lenders will have to make sure their customers can repay their loans and “still meet basic living expenses and major financial obligations” under a slate of federal rules to be proposed Thursday.
The Consumer Financial Protection Bureau is proposing a set of rules that it says will help people avoid falling into what it calls payday debt traps. It is holding a hearing Thursday in Kansas City to discuss industry issues and take comments from the public.
Its proposals also would require payday, auto title, deposit advance and some other lenders to use credit reporting systems, limit repeated unsuccessful efforts to debit customers’ accounts for payment, and offer principal payoff options and longer loan choices.
“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” bureau director Richard Cordray said in an announcement of the proposed rules. “By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail.”
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Payday loans are quick cash advances that lenders typically require customers to repay on their next payday, often by writing a check for that future date or by allowing lenders to directly debit their accounts for payment. Interest, fees and other costs balloon the average effective borrowing cost to consumers to nearly 400 percent, the consumer bureau has said.
Payday loans have become a target of consumer groups, private companies and federal agencies.
Google, for example, said it will ban payday loan ads from its search engine starting in mid-July, and Facebook banned them last year. The Federal Trade Commission has suggested alternative sources of credit for payday customers, and The Wall Street Journal reported that some employers have begun to offer low-cost short-term loans to employees who find themselves short of cash.
Two Kansas City area businessmen are facing federal charges over alleged payday lending abuses. Scott Tucker of Leawood and Richard Moseley Sr. of Kansas City have denied any wrongdoing.
The payday lending industry consists of a mix of storefront and online operations.
QC Holdings, based in Overland Park, is a payday lender whose shares trade publicly. It recently deregistered its shares with the Securities and Exchange Commission because it fell below the number of shareholders that requires public registration.
Payday lenders have defended their products in part through the Community Financial Services Association of America. The industry group promotes a best practices code.
States already provide a variety of regulations on payday lending, which the Pew Charitable Trusts has reported range from restrictive to permissive in their nature.
The CFPB labeled one of its proposed rules a “full-payment test” that lenders would be required to apply before extending a loan. Lenders would have to determine whether customers can afford each repayment as it comes due and still be able to meet basic living and major financial expenses. It also would make it more difficult for customers to reborrow or refinance the same debt.
Many borrowers who are unable to repay a payday loan borrow again to cover the first loan and rack up ever-greater costs. The rules would limit the number of short-term loans available in quick succession.
The rules that the federal agency proposed also would prevent lenders from repeatedly trying to debit customers’ accounts when the first two consecutive attempts prove unsuccessful. Multiple attempts to collect from an account with insufficient funds can create large fees for the borrower.
Lenders would have to get written permission from customers to debit an account and gain a “new and specific authorization” to try after two consecutive unsuccessful tries under the proposed rules.
The Consumer Financial Protection Bureau is holding a public session on payday lending at 10 a.m. Thursday at the Music Hall in Municipal Auditorium, 301 W. 13th St. A panel discussion involving government and industry officials and consumer advocates will be followed by comments from the public.