A federal consumer watchdog group proposed a new rule today aimed at cracking down on the payday loan industry, saying in a press release that "consumers are being set up to fail with loan payments that they are unable to repay."
Payday loans, sometimes called "cash advances" or "check loans," provide consumers with quick, short-term access to cash, but have come under harsh criticism recently for exorbitantly high interest rates and practices that trap consumers in debt.
The new proposed rule from the Consumer Financial Protection Bureau would require lenders to determine whether borrowers can afford to pay back their loans, as well as limit repeated debit attempts by the lender to collect payments that rack up additional fees for consumers.
“The Consumer Bureau is proposing strong protections aimed at ending payday debt traps,” said CFPB Director Richard Cordray said in the press release. “Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt. It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey. By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail.”
The protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installments and open end loans.
The move follows a number of reports that have highlighted the high costs to consumers of taking out such loans.
A few weeks ago Elliott Clark, a retired and disabled Marine from Kansas City, Missouri, told ABC News how he racked up $50,000 in interest after initially taking out $2,500 in payday loans.
"It was hard for me to talk about it without breaking down in tears," Clark told ABC News.
"The payday loan is a debt trap," he added. "It’s a spiraling cycle that takes you down to nothing, like I lost everything."
The new rule was announced on the CFPB website today. The rule will go through a 90-day public comment period and is scheduled to roll out in early 2017.
Critics Argue the CFPB's Move Is Not Enough
The House Financial Services Committee chairman Jeb Hensarling, R-Texas, condemned the CFPB’s move today in a statement, arguing that "for struggling Americans, the struggle just got harder."
“Just days after the Federal Reserve reported that almost half of American families say they would struggle to pay for emergency expenses of $400, here comes Director Cordray to make their struggle even harder,” Rep. Hensarling said. “Accountable to no one, he alone decides for all Americans whether they can take out a small-dollar loan to meet emergency needs.”
The Pew Charitable Trusts, a non-profit NGO that has studied small-dollar and payday loans for the past five years, also argued that the CFPB “misses historic opportunity” in its payday loan rule because it doesn’t go far enough.
"A $400, three-month loan made under the CFPB's proposed rules would typically carry fees of more than $350 dollars," Alex Horowitz, senior research officer for the Pew Charitable Trusts’ small-dollar loans project, told ABC News today.
The Pew Charitable Trusts argued in a statement today statement that the proposed CFPB rule "lacks clear product safety standards, makes it too easy for payday lenders to continue making harmful loans, and fails to encourage banks and credit unions to enter the market and make lower-cost loans.
“Payday loan reform is urgently needed, but without changes, the CFPB’s draft regulation misses the mark. Pew’s research shows that borrowers want three things: lower prices, manageable installment payments, and quick loan approval. The CFPB proposal goes 0 for 3." Nick Bourke, director of Pew’s small-dollar loans project, said in the statement.