Federal regulators are proposing a significant clampdown on payday lenders and other providers of high-interest loans, saying borrowers need to be protected from practices that wind up turning into “debt traps” for many.
The Consumer Financial Protection Bureau’s proposed regulations, announced Thursday, seek to tackle a few common complaints about the payday lending industry.
The bureau is proposing that lenders must conduct what’s known as a “full-payment test.”
Because most payday loans are required to be paid in full when due, usually two weeks to a month after the money is borrowed, the bureau wants lenders to prove that borrowers are able to repay that money without having to renew the loan repeatedly.
There would also be restrictions on the number of times a borrower can renew the loan.
Secondly, the bureau would require that lenders give additional warnings before they attempt to debit a borrower’s bank account, and also restrict the number of times they can attempt to debit the account. The aim is to lower the frequency of overdraft fees that are common with people who take out payday loans.
“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” Consumer Financial Protection Bureau Director Richard Cordray said in a prepared statement.
Payday lending is often described as an exploitive, deceptive industry that traps desperate borrowers in debt traps that can last for months.
Roughly half of all states ban payday lending outright or have caps on how much payday lenders can charge in interest. Even Google last month announced it would ban advertisements for payday loans, saying the industry creates “misleading or harmful products.”
But the industry’s products are widely used, as many Americans do not have enough savings to cover an emergency, as seen in a poll released last month by the Associated Press-NORC Center for Public Affairs Research. Roughly 12 million Americans take out a payday loan each year, according to the Pew Charitable Trusts, which has done extensive research on the industry. The average borrower takes out eight loans of $375 each per year, spending $520 on interest.
Cordray compared the situation to getting into a taxi for a crosstown ride and finding oneself stuck on a “ruinously expensive” trip across the country.
He said that the bureau’s proposal would aim to “prevent lenders from succeeding by setting up borrowers to fail.”