How new rules could drastically change payday loans

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Today, the Consumer Financial Protection Bureau proposed new rules requiring lenders to make sure borrowers can repay loans before approving them. The goal is to end so-called “payday debt traps” where those who can’t pay off their loan, initially intended to hold them over until payday, take out another one — a rollover.

“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” CFPB director Richard Cordray said in a statement. “It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey. By putting in place mainstream, common-sense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail.”

The proposed “full-payment test” would require lenders to determine whether the borrower can afford the full amount of each payment when due and still meet basic living expenses and major financial obligations. For payday and auto title installment loans without a balloon payment, a person must be able to afford all of the payments when due. For short-term loans and installment loans with a balloon payment, they have to be able to afford the total loan, fees and finance charges without having to re-borrow within the next 30 days.

The new rules would make it difficult for lenders to push distressed borrowers into refinancing the same debt, and also cap the number of short-term loans that can be made in quick succession. The proposal would allow lenders to offer some small-dollar loans with more flexible underwriting standards, if strict requirements are met.

Critics are concerned that this change will only amount to more profits for mainstream banks that make millions each month in fees they charge people in financial distress — people who would be better off taking out a payday loan than overdrawing their accounts on four or five checks.

“The CFPB’s proposed rule presents a staggering blow to consumers as it will cut off access to credit for millions of Americans who use small-dollar loans to manage a budget shortfall or unexpected expense,” said Dennis Shaul, CEO of the Community Financial Services Association of America, the trade group that represents payday lenders.

The CFBP will be taking public comments on its proposed rules until Sept. 14, 2016.

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