Dan Kitwood | Getty Images
The government’s consumer watchdog cracked down on payday loans.
The Consumer Financial Protection Bureau announced Thursday that it has finalized the rules targeting the payday lending industry. The rates on these short-term loans can the top 390%, and troubled borrowers often re-borrow, accumulate fees and interest.
This combination can create a debt trap that is difficult to escape, advocates say.
“Too often borrowers who need cash quickly find themselves trapped in loans they cannot afford,” CFPB director Richard Cordray said in the announcement. “The common sense protections of the repayment capacity rule prevent lenders from succeeding by causing borrowers to fail.”
Under the rule, lenders will have to perform an initial “payment in full” test to determine if borrowers will be able to repay the loan without compromising other financial obligations. Other protections include access to alternative loans for borrowers who do not meet these requirements.
The CFPB rules are the first national regulation for the payday lending industry.
“There is a lot of variation from state to state,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling. “Any step towards consistency is a victory for consumers, so people know what to expect, no matter where they live. “
However, the future of the measure is uncertain. Reuters last month reported that industry lobbyists and Republican lawmakers were “bracing for battle” against regulation. There is also legislation at stake which restrict the regulatory power of the CFPB and cancel other consumer protections it is already finalized.
Consumer advocates have hailed the payday loan rule as a good first step, with more need.
“The rule is an important first step and will benefit some consumers who need the help the most, but a lot of work is still needed to ensure that American families are no longer trapped in the debt of bad loans at high interest, ”Michael Best, director of outreach at the Consumer Federation of America, said in a statement.
Although the proposed rules included longer-term payday loans, the CFPB is still studying this market and did not include it in the final rule, said Lauren Saunders, associate director of the National Consumer Law Center.
“Payday lenders are turning to long-term payday loans which are an even deeper and longer debt trap than short-term loans, so the CFPB must act quickly to combat these predatory loans,” he said. she said in an email.
Even with the new protections, payday loans should still be “Loans as a last resort”, McClary said.
“It is always important that people think about any other possible alternative to avoid having to turn to a financial product that is the most expensive, and often the most difficult to repay,” he said.