NEW YORK (AP) – Federal regulators are proposing a significant clampdown on payday lenders and other providers of high-interest loans, saying borrowers need to be protected from practices that wind up turning into “debt traps” for many.
The Consumer Financial Protection Bureau’s proposed regulations, announced Thursday, seek to tackle two common complaints about the payday lending industry.
The CFPB is proposing that lenders must conduct what’s known as a “full-payment test.” Because most payday loans are required to be paid in full when they come due, usually two weeks after the money is borrowed, the CFPB wants lenders to prove that borrowers are able to repay that money without having to renew the loan repeatedly.
Secondly, the CFPB would require that lenders give additional warnings before they attempt to debit a borrower’s bank account, and also restrict the number of times they can attempt to debit the account. The aim is to lower the frequency of overdraft fees that are common with people who take out payday loans.
“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” CFPB Director Richard Cordray said in a prepared statement.