Consumer agency unveils payday loan rules

Financial regulators released a long awaited proposal Thursday to crack down on predatory lenders that prey on the poor.

Under the Consumer Financial Protection Bureau (CFPB)’s proposed rule, payday lenders would be forced to assess a borrower’s ability to make payments, while still meeting basic living expenses and other financial obligations.

Under the full-payment test, borrowers seeking a short-term loan or installment loan with balloon payments would have to be able to afford the total loan amount and all fees and finance charges without having to borrow more money within 30 days.

{mosads}Short-term lenders can avoid the full payment test on loans up to $500, but only if the payments are structured in such a way that allows the borrower to pay off the principal of the loan. As part of this principal payoff option, lenders could offer a borrower up to two extensions of the loan, but only if the borrower pays off at least one-third of the principal with each extension.

Lenders, however, would be barred from offering this option to consumers who have outstanding short-term or balloon-payment loans or have been in debt on short-term loans for more than 90 days in a 12-month period. They would also be prohibited from taking title of an automobile as collateral.

Under the proposed rule, lenders could offer less-risky longer-term loans if they meet the parameters of the National Credit Union Administration “payday alternative loans” program. The programs cap interest rates at 28 percent and the application fee at $20 or offers loans that are payable in roughly equal payments.

The rule forces lenders to notify consumers before they debit money from the customer’s account to collect payment and bars lenders from debiting the account after two unsuccessful attempts without the borrower’s consent.

The agency said consumers rack up bank fees when lenders repeatedly try to withdraw funds from accounts with insufficient funds. An agency study found that, over an 18-month period, half of online borrowers had at least one debit attempt with a failed payment or overdraft. More than one-third of borrowers with a failed payment lost their account.

Comments on the proposed rule are due on Sept. 14. Separately, the CFPB is asking for information on other risky products not covered by the rule like high-cost, longer-duration installment loans and open-end lines of credit. Those comments are due by Oct. 14.