New Payday Lending Rules Will Require Proof of Ability to Pay

Payday and car-title lenders must issue loans only to consumers who demonstrate they can afford them, much like banks and other financial institutions do, according to a nationwide rule issued this week by the Consumer Financial Protection Bureau (CFPB).

The new rule, which applies to loans that require all or most of the debt to be paid at once, will force lenders to check a borrower's ability to repay a loan — and still meet basic living expenses — before issuing that credit.

Bay Area lawmakers and California Attorney General Xavier Becerra welcomed the new regulations, which do not go into effect until the summer of 2019.

“I applaud the Consumer Financial Protection Bureau for taking action today to rein in abusive payday loan vendors," said Becerra in a statement. "Sadly, many of these businesses make money by preying on the most vulnerable — hardworking men and women, families with young children, seniors, and people with disabilities."

Borrowers often give permission to payday lenders to take repayments straight from their bank accounts. But lenders can charge payments even when the account is empty, which can rack up overdraft fees for the consumer. The CFPB's new rule will also limit a lender's ability to dip into a borrower's bank account after two unsuccessful attempts, a move that could help consumers avoid those overdraft fees.

A statewide industry group, the California Financial Service Providers Association, countered that the CFPB's decision will deprive millions of Americans of their right to "quick and affordable credit."

"We believe this rule will be devastating to consumers seeking access to credit, thereby causing irreversible harm to the very Americans the CFPB purports to help," said Thomas  Leonard, executive director of the association, which represents dozens of payday and other non-bank lenders statewide.

Consumer advocates anticipate the alternative loan industry might fight back with lawsuits and extensive lobbying in Congress to prevent the new regulations from going into effect. But they said  most Americans support implementing these reforms.

A 2015 poll sponsored by the Center for Responsible Lending found 78 percent of respondents, including 80 percent of Republicans, support requiring payday lenders to issue a loan only after determining the borrower can pay it back.

In California, seniors have become the largest group of borrowers for payday loans, which had an average annual interest rate of 372 percent last year, according a recent report by the state's Department of Business Oversight.

The CFPB said the new regulations aim to aim to stop "payday debt traps" that are often marketed to financially vulnerable communities.

Many payday loan customers have to borrow again in order to pay the original loan amount. More than four out of five payday loans are re-borrowed because payments are too expensive for cash-strapped consumers, according to the agency.

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

The consumer watchdog and its director have been under attack by Republican lawmakers in Congress. Representative Jeb Hensarling (R-TX), who chairs the House Financial Services Committee, has accused the agency of overstepping its authority and Cordray of using this payday rule for political gain.