The payday loan industry, long the target of consumer advocates, is now in line to be regulated by the federal government for the first time.
The Consumer Financial Protection Bureau (CFPB) is working on writing rules to oversee the $46 billion short-term loan industry, according to a report in The Wall Street Journal. They could include requirements that the lenders first check whether borrowers have the ability to repay the loan.
Payday lenders have argued that such a regulation would place a burden on them and could remove the option of getting one of these loans, typically seen as a last chance for consumers in need of quick cash. In a payday loan, borrowers essentially pledge their paycheck as security by writing a check to the lender in advance of their payday or by giving the lender authorization to draw money from their bank account on payday.
Consumer advocates have contended that the loans are particularly dangerous because they often roll over from one period to the next -- typically a two-week pay period -- as interest and fees mount at rates that can reach 200 percent, 300 percent or more. Those who end up taking the loans can get trapped in a borrowing cycle they can't escape from.
A CFPB report in March found that more than 80 percent of payday loans are rolled over or followed by a new loan.
Payday lenders are currently regulated by states, which can set interest rate caps that vary widely. The CFPB, however, could write rules that only ensure fairness and prevent consumers from being deceived. The Journal also noted that the rulemaking could include a similar industry, auto title loans.
The CFPB could make its proposal sometime later this year.