The Consumer Financial Protection Bureau proposed new regulations on Thursday that could help rein in predatory payday loans, short-term lendings that come with high interest rates that often exceed 300 percent.
Consumer protection groups, however, warn that they may not do enough.
Payday lenders disproportionately target poor Americans who need money fast to pay for costs like late bills. The average payday loan is $375, yet it takes five months and $520 in fees to pay off, frequently trapping borrowers in predatory debt spirals.
"Millions of Americans take out these loans every year," President Barack Obama said in a 2015 White House address. "But while payday loans might seem like easy money, folks often end up trapped in a cycle of debt. If you take out a $500 loan, it’s easy to wind up paying more than $1,000 in interest and fees."
The proposal by the Consumer Financial Protection Bureau, or CFPB, would require payday lenders to do a "full-payment test" to assess if borrowers can afford to repay loans greater than $500. It would also limit the number of short-term loans that can be made in a brief period of time.
Loan rollovers would furthermore face restrictions in the proposal, as would the number of times a lender could try to debit a borrower's bank account for owed money, which leads to piling-up fees. The proposal additionally would present alternatives for longer-term 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 explained in a statement.
“The very economics of the payday lending business model depend on a substantial percentage of borrowers being unable to repay the loan and borrowing again and again at high interest rates,” he added.
The CFPB was set up by Sen. Elizabeth Warren and others in the wake of the 2008 financial crisis, in hopes of shielding Americans from the malicious practices of the financial industry, including payday loan companies, banks, toxic mortgage lenders and debt collectors.
The New York Times reported that the payday loan industry "could soon be gutted by" the proposed regulations. Consumer advocacy groups, however, say this is an exaggeration.
Consumer advocacy groups argue the proposed regulations do not do enough, citing industry exemptions and potential loopholes they leave open.
“Borrowers want three things: lower prices, manageable installment payments, and quick loan approval,” noted Nick Bourke, the head of the Pew Charitable Trusts' small-dollar loans project. “The CFPB proposal goes 0 for 3.”
The nonprofit Center for Responsible Lending said it supports the proposed rules, but is concerned that they could leave industry loopholes.
"The lesson from the last 20 years since this industry started is that it's been remarkably effective at evading attempts at regulation and using a very high-powered lobbying machine to push for loopholes," explained the group's president, Mike Calhoun.
He warned that the proposed rules “could still keep borrowers in 10 or more 300-plus percent interest short-term loans in a year.”
The payday loan lobby, on the other hand, is furious about the proposed regulations. Jamie Fulmer, the spokesperson for lender Advance America, histrionically called the proposal "a death sentence" for the industry, and insisted it poses “a direct threat to millions of Americans’ access to affordable, transparent and reliable credit.”
Progressive non-profit organization Allied Progress says this is just industry hoopla. It praised the proposal, but encouraged the CFPB to further strengthen protections for consumers.
"While this is a good start and an important step in the right direction, the fight is far from over," said Allied Progress Executive Director Karl Frisch in a statement.
"Payday lenders have spent millions of dollars currying favor with powerful Washington politicians and they will do whatever it takes to keep this extremely lucrative predatory racket humming along," he added. "We owe it to hard working men and women everywhere to remain vigilant and fight on until the debt trap is ended once and for all."
Allied Progress has a campaign pressuring congresspeople who oppose the regulation. Frisch called on lawmakers to do more to rein in the predatory industry.
The new CFPB guidelines would not need congressional approval, and could take effect as soon as 2017. Some congress members are trying to shirk federal regulation with H.R. 4018, a bill that could effectively gut the proposed rules.
Prominent Democrats have come under attack for joining the Republican-led effort in support of this bill. Debbie Wasserman Schultz, a Florida congresswoman and chair of the Democratic National Committee, is one of its most high-profile co-sponsors.
Wasserman Schultz — a close ally of Hillary Clinton, who served as the co-chair of her 2008 presidential campaign — has received tens of thousands of dollars from payday lenders. Allied Progress has aired two television ads slamming the DNC chair for siding with the predatory industry.
When Salon inquired about the ads and Wasserman Schultz's views on the proposed federal regulations, her campaign replied vaguely, “Congresswoman Wasserman Schultz trusts that the CFPB, regardless of whether this bill becomes law, will ultimately do what’s right.”
The proposed CFPB regulations were deliberated for years, based on research and consultations with both customers and the industry.
There is a roughly 90-day period, until Sept. 14, during which the proposal is open to public comment and will be finalized. Consumer groups warn industry lobbyists will fight hard to weaken the regulations in this time.
The 2010 Dodd-Frank Wall Street reform law, passed in the wake of the Great Recession, granted the CFPB authority over the payday loan industry.
The FBI and IRS have already cracked down on fraud and racketeering in the industry, Reuters noted. The FBI investigation "Operation Chokepoint" has targeted predatory payday lenders.