The new payday loan rules being considered by the Office of Consumer Financial Protection would require lenders to guarantee the borrower’s ability to repay a loan, limit short-term credits to 45 days or less, and establish a time limit of 60 day reflection for borrowers on three loans in a row.
CFPB Director Richard Cordray outlined the proposed regulatory framework at a field hearing in Richmond, Va. On Thursday afternoon that sets out two sets of rules – debt trap prevention or debt trap protection – and lenders will be able to choose which one to follow.
Under the prevention rules, Cordray said lenders should check a consumer’s income, debt and borrowing history when determining their ability to pay off a loan in full while still covering basic living expenses. and its loan payments.
“This requirement applies to the entire loan, including principal, interest and the cost of any add-on product,” he said.
CFPB is considering a mandatory 60-day cooling off period before a borrower takes out a second and third loan, unless the borrower can prove that they have had a change in circumstances that would make the new loan affordable.
After three consecutive loans, there would be no exception to the 60 day gap.
The 60-day period, Cordray said, is to give borrowers time to recover financially before borrowing again.
If a lender chooses to follow the debt trap protection rules, CFPB said it would not be required to do an initial analysis of a borrower’s ability to repay a loan.
For borrowers wishing to roll over a loan, the CFPB decides whether debt protection rules would require a lender to structure loans so that a borrower repays the principal or obliges lenders to transfer borrowers to a repayment plan. extended free of charge after the third loan.
The rules would include a 60-day cooling off period for three consecutive loans and limit the length of time a consumer can be in debt to 90 days in a 12-month period.
All loans made under the debt protection rules would be limited to $ 500 with a single finance charge, and lenders would be prohibited from holding vehicle title as collateral for a loan.
The CFPB said it plans to have lenders follow the same protections that many credit unions offer under the National Credit Union Administration’s existing program for “alternative payday loans.” which cap interest rates at 28% and administration fees at $ 20.
Cordray said the agency is also considering limiting monthly loan payments to no more than 5% of a consumer’s monthly income.