Payday loans are a $38 billion industry. It’s used by tens of millions of consumers every single year in the United States. Over the years, particularly since the economic collapse, public officials and consumer advocacy organizations have complained about payday loans being predatory and prompting so many consumers to enter into a never ending spiral of debt.
Many states across the country have installed their own sets of rules and regulations, a few have even gone as far as prohibiting the industry from operating. But that isn’t enough for the federal government. They now want to implement federal guidelines for the entire industry.
The Obama administration proposed a series of new rules and regulations Thursday. This is a monumental victory for the Consumer Financial Protection Bureau (CFPB), which has been targeting payday loans since it was established by President Obama soon after he took office.
Under the proposal, bad credit loan stores and website aggregators will be required to verify a customer’s income to make sure that they can pay back the necessary funds. If the customer doesn’t earn enough money or lacks a minimum sum in their bank account then the payday loan application would be denied.
In addition, the new rule would prevent payday lenders from debiting borrower’s accounts over and over again. This would stop consumers from facing hefty bank fees from overdrafts or insufficient funds.
There would also be a cap placed on the number of payday loans one can take out in a short period of time.
The new rule was unveiled at a public hearing in Kansas City, Missouri. The general public has 90 days to comment on the proposed guideline. The final rule is projected to be completed by next year since it does not need to be approved by the Congress.
“Today, we’re announcing a proposed rule that would require lenders to determine whether borrowers can afford to pay back their loans. The proposed rule would also cut off repeated debit attempts that rack up fees and make it harder for consumers to get out of debt,” wrote David Silberman, CFPB’s acting deputy director, in a blog post announcing the rule. “These strong proposed protections would cover payday loans, auto title loans, deposit advance products, and certain high-cost installment loans.”
Within just a few hours, there have already been mixed reviews. Opponents of the proposal say the new limits would hurt the most vulnerable of borrowers that they want to help. Meanwhile, advocates of new federal rules say complex rules would discourage banks from offering such a product.
It may make sense considering that the payday loan rule comes with 1,300 pages, which is about 500 pages more than the mortgage rules outlined in 2013.
Other consumer groups, however, welcomed the proposal.
“Since the CFPB was created, the Bureau has worked diligently to understand the payday and car title market, examine the consumer experience and develop focused and data-driven interventions to prevent harmful practices,” said Tom Feltner, Director of Financial Services at Consumer Federation of America, in a statement.
For months, the CFPB has been trying to overhaul the high-interest, short-term loan industry. Since the financial industry has abandoned this part of the marketplace, the president argued that it was up to the federal government to ensure a Wild West doesn’t form in this area of the economy.