WASHINGTON – The US agency charged with protecting consumers from financial abuse released a proposal Thursday that would limit short-term loans known as “payday” loans, which can carry interest rates of up to 390 percent.
The proposal from the Consumer Financial Protection Bureau includes that lenders determine whether some borrowers can pay their debts. It also requires restrictions on loan rollovers.
Payday lenders often cater to low-income borrowers who need cash in a pinch but cannot access financing from traditional banks. The name comes from the idea that a borrower would get an emergency loan and repay it with the next paycheck. Since loans are often unsecured, lenders run the risk of not being repaid and charge higher rates.
“Too many borrowers seeking a short-term cash solution are burdened with loans they cannot pay and are sinking into long-term debt,” CFPB Director Richard Cordray said in a statement, calling the proposal “current. main “and” common sense “.
“It’s a lot like hopping into a taxi across town and finding yourself stuck on a wildly expensive cross-country trip.”
The CFPB proposal includes a “full payment” test for people who borrow up to $ 500 for a short period. Lenders would have to determine whether a borrower could afford to pay off each loan and still cover basic living expenses, according to a summary.
It would prohibit lenders from taking car titles as collateral and make it difficult for them to “pressure distressed borrowers to lend again.” It would also limit the number of short-term loans made in quick succession. At the same time, it would limit the number of times a lender could attempt to debit a borrower’s bank account for an outstanding payment, and the CFPB says that failed withdrawal attempts accrue bank fees for borrowers.
The proposal presents two alternatives for longer-term loans. One caps interest rates at 28 percent and the application fee to $ 20. The other is an installment loan of equal payment amounts, with the total cost of the loan capped at 36 percent.
The agency said current practices trap borrowers in ‘debt traps’ with the accumulation of fees and interest, and that they encourage people to take out new loans to pay off old debts, all of which can leave them bankrupt, without bank accounts or no car.
Lenders say they fill a critical hole in the economy, allowing people who live paycheck to paycheck to cover basic costs and those in need, who may have poor credit histories, get loans quickly.
The fight for the proposal will last for months. The agency will evaluate comments on the proposal on September 14 before issuing final regulations. It is also beginning a review of “other potentially high-risk loan products and practices,” such as indefinite credit.
An Advance America loan store window is displayed in Palm Springs, California, USA on June 2, 2016. (REUTERS / Sam Mircovich)