New rules could upend payday loan industry

High-cost loans will be reined in under new rules unveiled today that promise to radically overhaul the payday loan industry.

While the rules will not ban payday loans, they will require lenders to make only loans that borrowers, many of whom are working poor, are able to repay without taking on spiraling debt. The new rules apply to two-week balloon payment payday loans and those with longer-term installment payments.

The median fee on a storefront payday loan is $15 for every $100 borrowed, according to the Consumer Financial Protection Bureau.

Traditional banks generally do not engage in this kind of lending. While some states have banned these predatory loans, payday lenders have proliferated in at least 36 states, according to the bureau.

The rules were drafted by the Consumer Protection Financial Bureau, created in the aftermath of the financial crisis to protect consumers. Among those reporting on the new rules are The New York Times, Forbes and The Guardian.

Some consumer advocacy groups say significant loopholes remain. They worry that lenders will be able to make up to three consecutive payday loans and can offer the loans again after 31 days. Balloon payments associated with longer-term loans also could lead to more debt.

“The protections against loan flipping and loan refinancing need to be strengthened,” said Lauren Saunders, associate director of the National Consumer Law Center, which is headquartered in Boston. “They can keep you in a long-term debt trap. We’re concerned about whether the underwriting requirements are strong enough, especially for the longer-term loans.”

Lenders, meanwhile, complain that the new rules will hurt the industry and borrowers alike.

“The CFPB’s proposed rule presents a staggering blow to consumers as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense,” the Community Financial Services Association of America, which represents payday lenders, said in a statement. “It also sets a dangerous precedent for federal agencies crafting regulations impacting consumers.”

The new rules likely will take effect in 2018.

Separately, the federal consumer agency is working on rules to crack down on predatory practices involving payday lender prepaid debit cards, which typically are issued to consumers with bad credit or trouble with bank accounts because of overdraft problems.

The Consumer Financial Protection Bureau issued proposed rules at the end of 2014 to protect these consumers. The agency is expected to announce new rules for these prepaid debit cards this summer.

Currently, there are no caps on overdraft fees for prepaid debit cards, and payday lenders can take money directly from borrowers’ accounts.

Under the proposed rules, fees for overdrawing on an account over the course of the first year could not exceed more than 25 percent of the amount of overdraft on the card. But the proposed rules do not completely ban overdraft fees.

Saunders remains concerned. While the proposed rules would limit fees, it would be only in the first year of having the debit card, she said. In addition, they would not limit interest.

Jennifer Gollan can be reached at jgollan@cironline.org. Follow her on Twitter: @jennifergollan.