Payday lenders face new federal regulations aimed at preventing low-income borrowers from being buried under high fees and growing debt.
The Consumer Financial Protection Bureau will unveil a proposed set of rules on Thursday. President Barack Obama is also expected to deliver an afternoon speech in Birmingham, Alabama, to address plans to oversee the wages industry and the efforts of Congressional Republicans to limit the authority of the office.
Borrowers who barely get by on low wages have increasingly relied on in-store and online lenders, prompting the federal government to set standards for a multibillion-dollar industry that has always been regulated at the state level.
The constantly compounded fees for loans have overwhelmed some borrowers, causing them to lose their bank accounts and cars – and even risk jail time. The regulations are designed to ensure that debts can be repaid, instead of plunging borrowers into worse circumstances.
“Giving people credit in a way that prepares them for failure and traps considerable numbers in prolonged debt traps is just not responsible lending,” said CFPB director Richard Cordray , in remarks prepared for a Thursday hearing in Richmond, Va.
The proposed rules would apply to payday loans, vehicle title loans – in which a car is used as collateral – and other forms of high-cost loans.
Before extending a loan due within 45 days, lenders should ensure that consumers can pay off all of the debt on time. Income, borrowing history and other financial obligations should be checked to show that borrowers are unlikely to default or renew the loan.
Typically, there would be a 60-day “cooling off period” between loans and lenders would have to offer “affordable repayment options”. Loans could not exceed $ 500, have multiple finance charges, or require a car as collateral.
The CFPB described a similar set of rules proposed to regulate long-term, high-cost loans with repayment terms ranging from 45 days to six months. These proposed rules also include the ability to cap interest rates or repayments as a share of income.
The rules – which are meant to ensure a successful refund – will be reviewed by a panel of small business representatives and other stakeholders, before the office formalizes the proposal for written public comments and establishes final settlements.
The payday loan industry warns that overly strict regulation could reduce the flow of credit for Americans who need it most, saying the CFPB should continue to study the industry before setting additional rules.
“The office looks at things through the lens of one size,” said Dennis Shaul, general manager of the Community Financial Services Association of America.
But this lens also reveals disturbing images.
Wynette Pleas, of Oakland, Calif., Says she experienced a nightmare after taking out a payday loan in late 2012.
The 44-year-old mother of three, including a blind son, borrowed $ 255 to buy groceries and pay the electric bill.
But holding a part-time position as a nursing assistant, her hours were scarce. Pleas told the lender that she would not be able to meet the two week loan deadline. Yet the lender tried to withdraw the repayment directly from her bank account even though she did not have the funds. This caused Pleas an overdraft fee of $ 35 and a bad check.
After this happened six times, Pleas said the bank closed his account.
Collection agencies have started calling Pleas and his family. About six months ago, she learned that the $ 255 loan had inflated debt to $ 8,400 and the possibility of jail time.
“It’s not even worth it,” said Pleas, who is now rebuilding his finances and his life.
The proposed settlement comes after a 2013 CFPB analysis of payday loans. For an average loan of $ 392 that lasts just over two weeks, borrowers were paying in fees the equivalent of an annual interest rate of 339%, according to the report. The median borrower earned less than $ 23,000 – below the poverty line for a family of four – and 80% of the loans were rolled over or renewed, resulting in increased fees. In the 12 months, nearly half of all payday borrowers made more than 10 transactions, meaning they either renewed existing loans or borrowed again.
“They end up trapping people in longer term debt,” said Gary Kalman, executive vice president of the nonprofit Center for Responsible Lending.
Several states have attempted to restrict payday loans. Washington and Delaware limit the number of loans a borrower can take out each year, while Arizona and Montana have capped annual interest rates, according to a 2013 report from the Center for Responsible Lending.
Industry representatives said states are better set up to regulate the industry, ensuring consumers can be protected while lenders can also experiment with new loan products.
“We think states are doing a good job of regulating the industry,” said Ed D’Alessio, executive director of the Financial Service Centers of America. “They have a longer experience. They get there with a standard where the laws governing the industry have gone through the legislative process.”