NEW YORK – Payday and auto title lenders will have to adhere to stricter rules that could significantly curtail their business under rules finalized Thursday by a federal regulator. But the first nationwide regulation of the industry is still likely to face resistance from Congress.
The Consumer Financial Protection Bureau's rules largely reflect what the agency proposed last year for an industry where the annual interest rate on a payday loan can be 300 percent or more. The cornerstone is that lenders must now determine before giving a loan whether a borrower can afford to repay it in full with interest within 30 days.
A key goal is to prove that borrowers, who are often in dire financial situations, are able to pay without having to renew the loan repeatedly. The rules would set limits on the number of times a borrower could renew. Because studies by the CFPB have found that about 60 percent of all loans are renewed at least once and that 22 percent of all loans are renewed at least seven times, this cap is likely to severely wound the industry's business model. In California, the largest payday loan market, repeat borrowers made up 83 percent of the industry's loan volume.
The CFPB estimated that loan volume in the payday lending industry could fall by 55 percent under the new rules. The industry, which operates more than 16,000 stores in 35 states, will likely see thousands of payday lending store closures nationwide. Regulation of the sector has been largely left to the states, 15 of which effectively ban payday lending or auto title lending due to the caps on interest rates.
“Too often, borrowers who need quick cash end up trapped in loans they can't afford. The rule's common-sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail,” CFPB Director Richard Cordray said in a statement.
While the industry may garner little sympathy from the public, there is an economic need for small dollar, short-term loans. Roughly 12 million people took out a payday loan in 2010, according to the Pew Charitable Trusts. And there's a concern that those who use payday loans might turn to other high-cost ways of making ends meet, like using pawn shops.
“The CFPB's misguided rule will only serve to cut off their access to vital credit when they need it the most,” said Dennis Shaul, chief executive of Community Financial Services Association of America, a trade group for the payday lending industry.