U.S. Regulators Propose Rules to Crack Down on High-Interest Payday Loans

By Silver-Greenberg, Jessica | International New York Times, March 27, 2015 | Go to article overview

U.S. Regulators Propose Rules to Crack Down on High-Interest Payday Loans


Silver-Greenberg, Jessica, International New York Times


The regulations could sharply winnow down the number of unaffordable loans that lenders can make each year to Americans desperate for cash.

The Consumer Financial Protection Bureau, the fledgling agency created in the aftermath of the financial crisis, outlined on Thursday the first draft of regulations to rein in payday loans, the short-term form of credit that can come with interest rates soaring beyond 400 percent.

The proposed rules could sharply reduce the number of unaffordable loans that lenders can make each year to Americans desperate for cash. The proposal covers a wide swath of credit, including certain loans backed by car titles and some installment loans that stretch longer than 45 days.

"We are taking an important step toward ending the debt traps that are so pervasive in both the short-term and longer-term credit markets," Richard Cordray, the director of the Consumer Financial Protection Bureau, said in a statement on Thursday.

The proposals are based on a fundamental premise: Borrowers should be able to repay their loans, including interest, principal and fees, without falling behind or borrowing more money to cover their debt.

The plans would require lenders to assess customers' income, other financial obligations and borrowing history to ensure that when the loan comes due, there is enough money to cover it.

Few people who have tapped short-term loans can repay them on time, the bureau found in an analysis of roughly 15 million payday loans. Borrowers, the bureau said, took out a median of 10 loans in a 12-month span. More than 80 percent of loans were rolled over or renewed within a two-week period.

The borrowing patterns speak to a stark reality underpinning the roughly $46 billion payday loan industry: The working poor in America, a group with almost no savings and little access to traditional loans, use payday loans to cover basic expenses.

Nearly 70 percent of borrowers use the loans, tied to their next paycheck, to pay for basic expenses, not one-time emergencies, as some in the payday lending industry have claimed. The Pew Charitable Trust found that 16 percent of borrowers use the loans for emergencies.

Such precarious financial footing helps explain how one loan can prove so difficult to repay.

Borrowers who take out 11 or more loans, the bureau found, account for roughly 75 percent of the fees generated.

The proposals generated a mixed reaction from consumer advocates, including some who worried that the rules did not go far enough.

"Loopholes would permit some unaffordable high-cost loans to stay on the market," said Lauren Saunders, associate director of the National Consumer Law Center. Lenders have shown their dexterity in shifting their products to get around state laws aimed at stamping out the loans.

In drafting the rules, according to interviews with people briefed on the matter, the Consumer Financial Protection Bureau, and its director, Mr. Cordray, wrestled with how to protect some of the most vulnerable consumers, without choking off credit entirely. …

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