Federal agency cracks down on payday lending

Payday and auto title lenders will have to adhere to stricter rules that could significantly curtail their business under rules finalized Thursday by a federal regulator. But the first nationwide regulation of the industry is still expected to face resistance from Congress.

The Consumer Financial Protection Bureau’s rules largely reflect what the agency proposed last year for an industry where the annual interest rate on a payday loan can be 300 percent or more. The cornerstone is that lenders must determine before giving a loan whether a borrower can afford to repay it in full with interest within 30 days.

A key goal is to prove that borrowers, who are often in dire situations, are able to pay without having to renew the loan repeatedly. The rules would set limits on the number of times a borrower could renew the loan. Because studies by the bureau have found that about 60 percent of all loans are renewed at least once and that 22 percent of all loans are renewed at least seven times, this could hurt the industry’s business model. In California, the largest payday loan market, repeat borrowers made up 83 percent of the industry’s loan volume.

The agency estimated that loan volume in the payday lending industry could fall by 66 percent under the new rules. The industry, which operates more than 16,000 stores in 35 states, could see thousands of payday lending store close. Regulation of the sector has been largely left to the states, 15 of which effectively ban payday lending or auto title lending due to the caps on interest rates.

“Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common-sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail,” agency Director Richard Cordray said in a statement.

While the industry may garner little sympathy from the public, there is an economic need for short-term loans of small amounts, and people who use payday loans now might turn to other highcost ways of making ends meet, like pawn shops. The payday lending industry has a significant lobbying presence in Washington, and Republicans tend to be hostile toward any regulations proposed by the regulator, which was created by the Obama administration.

The rules would also restrict the number of times a payday lender can attempt to debit a borrowers’ account for the full amount without getting additional authorization.

Consumer advocates cheered the decision.

“Payday and car title lenders profit from repeatedly dragging hardpressed people deeper and deeper into debt, and taking advantage of families when they are financially vulnerable,” said Lisa Donner with Americans for Financial Reform. “Curbing the ability to push loans that borrowers clearly cannot repay is a key protection.”

But there are bills pending in Congress to more severely restrict the types of regulations the consumer protection agency can propose, and Republicans have called for President Donald Trump to fire Cordray.

The only federal regulation that had applied to the payday lending industry was the Military Lending Act, which places interest-rate and debt-collecting restrictions on loans to servicemen and women. This would be the first time all consumers would be impacted.

The new rules will take effect 21 months from when they are published in the Federal Register, which usually happens within a week of an announcement.