Consumer Protection Bureau Releases Payday Lending Rule, Calls for Credit Union-Style Services

The Consumer Protection Bureau building in Washington, DC. (Photo: Ted Eytan; Edited: LW / TO)The Consumer Financial Protection Bureau building in Washington, DC. (Photo: Ted Eytan; Edited: LW / TO)

Consumer Financial Protection Bureau Director Richard Cordray touted existing alternatives to payday lending on Thursday, as the agency released long-anticipated rules to curtail abusive loansharking.

Cordray described the so-called “small-dollar” credit market as fundamentally broken, and said he hoped the proposed regulations would push the financial industry toward less predatory practices.

“We are not intending to disrupt existing lending by community banks and credit unions that have found efficient and effective ways to make small-dollar loans to consumers that do not lead to debt traps or high rates of failure,” he said. “We want to encourage other lenders to follow their model.”

Cordray made the remarks at an unveiling of the rules in Kansas City, Mo.

The rules, which had been preceded by years of Congressionally-mandated agency studies, would prohibit payday lenders from issuing certain types of shot-term credit without conducting any prior checks on a borrower’s ability to repay.

Loans that require borrowers to put up their car as collateral would be barred, for example, if the lender did not first conduct due diligence. A study released last month by the CFPB found that 20 percent of so-called “auto title” borrowers end up losing their car.

Lenders would not, however, need to means-test a borrower if they adhere to National Credit Union Administration standards on payday alternatives. The federal credit union regulator allows “payday alternative loans” with interest rates capped at 28 percent and application fees limited to $20.

“This option would be available to all lenders on the same basis and not just to federal credit unions,” Cordray noted.

The new regulations would also limit lenders’ ability to “roll over” debt — a practice that sees borrowers mired in a cycle of debt that often lasts months.

“More than half of all payday loans are made to borrowers…

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