Federal regulators on Thursday will outline a proposal 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 be required to make sure borrowers can afford to repay and to notify borrowers before debiting payments from their checking accounts.
The rules also would limit the number of loans borrowers could take out and the number of times lenders could try to withdraw money from borrowers’ accounts, a practice that the consumer bureau says often ends up burdening consumers with excessive fees.
The proposal will be announced at a public hearing in Richmond, Va., by Richard Cordray, director of the bureau, a government watchdog with jurisdiction over small-dollar loans.
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Also Thursday, President Barack Obama is scheduled to speak in Birmingham, Ala., about predatory lending practices.
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 commonsense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.”
Under the proposal from the consumer agency, 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 borrower’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 and during a year-long period.
Lenders expressed alarm that the proposed 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 each 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, the group’s CEO, Dennis Shaul, said in a statement.
The consumer bureau also should consider the negative impact on lenders who are small businesses, Shaul said.
The proposal will go through a public comment process before any final rule is issued.
Consumer advocates hailed the proposal for its potential to make payday and other small loans safer for consumers. But they expressed concern that what they called “loopholes” might allow some unaffordable loans to stay on the market.
For example, the rules to be outlined by the bureau Thursday would allow up to three back-to-back payday loans and up to six payday loans a year, said National Consumer Law Center associate director Lauren Saunders. Triple-digit, six-month installment loans also would be permitted as long as payments were limited to 5 percent of the borrower’s gross income, regardless of the borrower’s expenses or debts.
“That is a dangerous approach that blesses unaffordable high-rate loans,” Saunders said in a statement.
Email: email@example.com; Twitter: @lindsaywise. White House correspondent Lesley Clark contributed to this report.