Many payday lenders could go out of business if rules made final this week by the Consumer Financial Protection Bureau go into effect. But the changes face stiff headwinds from Republicans in Congress.
One new rule would require payday and auto title lenders to determine whether a borrower can afford to repay in full within 30 days. That could thwart a business model that consumer advocates say relies on the rollover of unpaid loans with the accumulation of exorbitant fees and interest rates of 300 percent or more.
The proposed regulations also would limit the number of times a lender can debit a borrower's account without being reauthorized to do so. As The Associated Press writes, "This is because many payday loan borrowers end up over-drafting their bank accounts, which in turn incurs fees" or forces them to close their accounts.
"Too often, borrowers who need quick cash end up trapped in loans they can't afford," CFPB Director Richard Cordray said in a statement. "The rule's common-sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail."
"Payday lenders offer short-term cash loans in exchange for a postdated check, usually dated for your next payday. The amount of the check includes the loan total and a finance charge. For example, you write a check for, say, $115 to receive a $100 loan. Given a two-week loan term, which is fairly standard, the $15 finance charge works out to an APR of nearly 400%, and this assumes you pay back the loan on time."
But a 2014 study by the CFPB found that the vast majority of payday loans are not paid back on time: More than 80 percent are rolled over or followed by another loan within two weeks. The study found that 15 percent of new loans "are followed by a loan sequence at least 10 loans long."