CFPB releases framework for payday loan rules

The new rules for payday loans the Consumer Financial Protection Bureau is considering would force lenders to ensure a borrower’s ability to repay a loan, limit short-term credits to 45 days or less and establish a 60-day cooling-off period for borrowers who take out three loans in a row.

CFPB Director Richard Cordray outlined the framework for the proposed regulations at a field hearing in Richmond, Va. Thursday afternoon that maps out two sets of rules – debt trap prevention or debt trap protection – and lenders will be able to chose which set to follow.

Under the prevention rules, Cordray said lenders would have to verify a consumer’s income, debt and borrowing history when determining his or her ability to repay a loan in full and still cover their basic living expenses and loan payments.

“This requirement applies to the whole loan, including the principal, the interest and the cost of any add-on products,” he said.

CFPB is considering a 60-day mandatory cooling-off period before a borrower takes out a second and third loan unless the borrower can prove they’ve had a change in circumstances that would make the new loan affordable.

 After three consecutive loans, there would be no exceptions to the 60-day gap.

The 60-day period, Cordray said, is to give borrowers time to recuperate financially before borrowing again.

If a lender chooses to follow the debt trap protection rules, CFPB said they would not be required to do an upfront analysis of a borrower’s ability to repay a loan.

For borrowers wanting to rollover a loan, CFPB is deciding whether the debt protection rules would require a lender to structure the loans so a borrower is paying down the principal or make lenders switch borrowers to a no-cost extended repayment plan after the third loan.

 The rules would include a 60-day cooling off period for three consecutive loans and would cap how long a consumer can be in debt in a 12-month period at 90 days.

All loans made under the debt protection rules would be limited to $500 with one finance charge and lenders would be prohibited from holding a vehicle title as collateral on a loan.

The CFPB said it’s considering making lenders follow the same protections as loans that many credit unions offer under the National Credit Union Administration’s existing program for “payday alternative loans,” which cap interest rates at 28 percent and application fees at $20. 

Cordray said the agency is also considering limiting monthly loan payments to no more than 5 percent of the consumer’s monthly income.