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CFPB Releases Plan to Eliminate Payday Lending 'Debt Traps'
Friday, March 27, 2015 6:35 AM

The Consumer Financial Protection Bureau just released a plan aimed at eliminating payday lending "debt traps." The new consumer protections would apply to payday loans, vehicle title loans, deposit advance products, and certain high-cost installment and open-end loans.

Credit Union National Association is currently evaluating the proposal.

The proposal would cover short-term credit products (which must be paid in full within 45 days) and long-term loans where the lender collects payments through access to the borrower's bank accounts. One of the proposal's main focuses is requiring a lender to determine a borrower's ability to repay a loan before granting it.

For long-term loans, the CFPB is considering protections already used by the National Credit Union Administration for its payday alternative loan program. Those loans are capped at 28 percent interest and an application fee of no more than $20.

The other approach the CFPB is examining for long-term loans would cap a loan payment amount at no more than 5 percent of their gross monthly income, and no more than two such loans can be made to a borrower within a 12-month period.

For short-term loans, lenders would have to verify a borrower's income, financial obligations and borrowing history to determine the consumer's ability to repay. There would be a 60-day "cooling off period" between loans, loans cannot be made within that period unless there is documentation the borrower's circumstances have improved enough to repay without re-borrowing.

Lenders also would not be allowed to keep consumers in debt on short-term loans for more than 90 days in a 12-month period. Rollover loans would be capped at two, followed by a mandatory 60-day cooling off period.

For the second and third consecutive short-term loans, the CFPB is considering two options. One would require the principal decrease with each loan, so that it is repaid after the third loan, or require the lender provide a no-cost "off-ramp" after the third loan, to allow the consumer to pay the loan off over time without further fees.