Can you afford this payday loan? The federal government says lenders should ask

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The Consumer Financial Protection Bureau will release a series of sweeping proposals on Thursday to reshape the market for payday loans and other expensive types of credit that the agency and consumer advocates call “debt traps.”

The proposed settlement, to be released ahead of a hearing in Kansas City, Mo., comes after years of preparation by the bureau, which since 2013 has released several reports critical of the payday loan industry.

The rules would limit the number of payday loans a consumer can take out each year, change how lenders collect payments and require them to take a closer look at borrowers’ finances to ensure they can afford to repay their loans.

Although consumer groups support parts of the proposal, some worry the rules don’t go far enough, leaving consumers with plenty of opportunities for bad business. Lenders, meanwhile, are chafing at the proposal, which they say will increase their costs and make it unprofitable to provide loans to many consumers.

In prepared remarks for Thursday’s hearing, CFPB Director Richard Cordray said lenders too often made loans knowing borrowers would not be able to repay them, locking them into a cycle of indebtedness.

“If a lender can succeed while borrowers fail, that’s a telltale sign of market failure,” he said. “When the balance between lenders and borrowers is upset, the ‘win-win’ dynamic found in healthy credit markets disappears and puts consumers at great risk.”

At the heart of the proposal is a requirement that lenders determine that a borrower has the ability to repay. This means that lenders will need to look at the borrower’s income and subtract bills, rent and other living expenses to determine if there is enough left over to pay the loan repayments.

The bureau wants to make sure borrowers won’t repay a payday loan, then find they don’t have enough money to make any further payments, forcing them to take out another loan — the kind of ‘trap. debt” he is trying to end.

The CFPB has previously required mortgage lenders to determine borrowers’ ability to repay when applying for a mortgage, but lenders who make small loans, typically for just a few hundred dollars, typically don’t do as much analysis. detailed.

California borrowers who walk into an Advance America payday loan branch, for example, can walk away with a $255 loan after just 15 or 20 minutes, company spokesman Jamie Fulmer said. Spending much longer than that on such a small loan, he said, doesn’t make sense.

“Going through an arduous and detailed analysis of take-home pay and household expenses for a $255 loan is onerous,” Fulmer said. “It would add time to the process, expense to the process, and complexity to the process, none of which is good for consumers.”

The Consumer Bankers Assn., a trade group made up primarily of banks, not payday lenders, agreed, saying in a report that the CFPB’s proposed underwriting requirements are “as comprehensive and rigorous for a small $500 loan than taking out a $500,000 loan. mortgage.”

Kris Kully, an attorney in the consumer financial services practice at law firm Mayer Brown, said the underwriting requirements would naturally prevent some consumers from getting loans. What’s not clear, she says, is what those consumers might do instead.

“I don’t know exactly what the alternative will be,” she said. “The CFPB finds that some consumers who take out these loans end up worse off. But I don’t know what the agency would ask borrowers to do instead.

Rebecca Borné, senior policy adviser at the advocacy group Center for Responsible Lending, which generally supports the CFPB’s proposal but has called for tougher rules, said some consumers who cannot meet the new requirements will turn to other less harmful forms of borrowing.

That includes pawnshops and loans from friends and family — alternatives, she said, that many payday loan borrowers end up turning to at some point to repay their loans. at high interest rate.

The CFPB proposal offers lenders a few ways to circumvent repayment capacity rules. For example, they don’t have to do a full analysis if they limit the number of times a borrower can refinance the loan and meet other requirements.

But the limitations wouldn’t prevent borrowers who can’t get additional payday loans from taking on other types of high-cost debt, including installment loans, which often carry triple-digit interest rates and are repaid over years rather than weeks, said Alex Horowitz. , a researcher with the non-profit organization Pew Charitable Trusts.

The repayment capacity rules proposed by the CFPB would also apply to installment lenders, but because they provide loans that are repaid over longer terms, individual payments can be smaller – and therefore appear more affordable, even if borrowers often end up paying more interest. that they borrowed in the first place.

“We’re going to see loan terms get longer, but we probably won’t see prices go down,” Horowitz said. “The reason this proposal misses the mark is that it moves the market to longer terms but not at lower cost.”

The office will be accepting public comments on the proposed rules until September. The rules could go into effect in about a year.

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