The Consumer Financial Protection Bureau (CFPB) is on the brink of issuing the first national rules for payday lending.
At a recent CFPB hearing in Nashville, payday representatives voiced concern that the bureau will cap annual interest rates at 36 percent. This limit was adopted by Congress in 2007 legislation that restricts small-dollar loans to members of the military, but the Dodd-Frank Act bars the CFPB from setting such a ceiling. Instead, the new federal rules probably will establish a regulatory floor below which the states may not fall, since state laws vary widely in their governance of payday lending.
Although the CFPB has not revealed whether its rules will incorporate an ability-to-pay standard, this component is the top priority for consumer advocates. Because much of the industry's profits comes from repeat customers, consumer advocates are calling for a requirement that all borrowers be evaluated to determine whether they can afford the loans. "Let's look at their accounts, and look at whether they have a positive flow over a period of time that will allow them to pay off the loan," says Paul Leonard, West Coast director at the Center for Responsible Lending.
Another top priority for consumer advocates is that the new federal rules target lenders that insist on having access to borrowers' bank accounts. Existing law makes it illegal for lenders to condition their loan approval on the borrower agreeing to a particular method of repayment, but it can still be difficult for borrowers to take out payday loans without giving the lender electronic access to their checking accounts. At the hearing in Nashville, CFPB director Richard Cordray said the agency has found that "some lenders use the electronic payment system in ways that pose risks to consumers."
There is no indication that the bureau is planning to create one broad set of rules to cover all forms of small-dollar credit. At this point, the rulemaking process could take several months, a year, or even longer.