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 The framework unveiled by the U.S. Consumer Financial Protection
Bureau was a key step toward new rules for various types of loans
that regulators say trap borrowers in debt.
Payday loans are small-dollar extensions of credit that borrowers
agree to repay in a short time, such as when they next receive a
paycheck. Similar products include car title loans, in which
borrowers use vehicles as collateral, and installment loans, which
can be longer-term and are paid back in larger amounts.
Lenders who offer the products say they help people who are strapped
for cash. But consumer advocates say borrowers often roll over or
refinance loans rather than paying them back, racking up debt due to
high interest rates and fees.
"Too many short-term and longer-term loans are made based on a
lender's ability to collect and not on a borrower's ability to
repay," CFPB Director Richard Cordray said in a statement.
"The proposals we are considering would require lenders to take
steps to make sure consumers can pay back their loans."
The framework gives lenders two compliance options. They could
verify prospective borrowers' income and debt history to guarantee
they can repay loans, or they could offer cheap repayment options
and limit how many loans people may take out.
The requirements are tailored so that slightly different rules apply
to short-term loans, which must be repaid within 45 days, versus
those stretching longer.
Even before the framework was released, lenders warned the consumer
bureau to take care not to disrupt access to credit or hurt small
businesses.
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"Consumers thrive when they have more choices, not fewer, and any
new regulations must keep this in mind," the Community Financial
Services Association of America, which represents short-term
lenders, said in a statement on Wednesday.
Lawmakers created the CFPB as part of the 2010 Dodd-Frank financial
oversight law. In 2013, the watchdog said high-cost loans often
ensnare borrowers in a cycle of debt and warned that rules could be
on the way.
The framework released on Thursday marks a step closer toward
federal oversight for an industry that has historically been
regulated at the state level. A CFPB spokesman said a formal
proposal could come later this year.
A comment period for the public and the industry would follow, after
which the rules could be finalized.
(Reporting by Emily Stephenson; Editing by Dan Grebler)
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