Payday loan rules may not be tough enough

Consumer advocates widely agree that the federal government needs to rein in payday lending firms. Less certain is whether new rules proposed today by the Consumer Financial Protection Bureau will do the trick.

The main criticism of payday lenders is that they issue loans without first verifying that borrowers can afford to repay them, they trap people in an extended cycle of debt and they pile on fees and other charges.

The CFPB would address some of those problems by requiring lenders to determine upfront that consumers can repay a loan when it's due without having to borrow more money and that they can still meet their basic living expenses.

Payday loan firms would also have to start reporting borrower payments to the major credit bureaus, which can help rebuild a person's credit. And lenders would be limited in how many times they can try to debit someone's bank account -- which can rack up fees and make repayment even harder.

The CFPB, which was created in 2010 under the Dodd-Frank financial reform law, is taking action because payday lending is regulated by the states, leaving a hodgepodge of rules of varying strength around the U.S.

The Consumer Federation of America said the "ability to repay" standard proposed by the CFPB is an important step forward because it will help ensure that consumers can make loan payments without falling behind on housing, child care and other expenses. The advocacy group also praised the effort to deter payday firms from repeatedly trying to collect loan payments directly from a customer's bank account, noting that millions of borrowers get hit with overdraft and other fees.

But other experts see serious shortcomings with the CFPB rules. The biggest, according to Nick Bourke, director of the small-loans project at The Pew Charitable Trusts, is that the proposal would do little to stamp out the exorbitant interest rates, which average nearly 400 percent, and the fees found in most payday and auto-title loans.

Another problem, one that could allow payday firms to evade the rules or make them hard to enforce: complexity. The CFPB's proposal runs more than 1,500 pages.

"The rule lacks the clear, simple guidance that would pave the way for better alternatives from banks and credit union," Bourke said, arguing that murky or confusing federal standards for payday loans could deter other lenders from developing products for lower-income borrowers.

Pew also noted that payday firms have already shifted much of their business to offering high-cost installment loans, which are repayable over a longer period of time but which also commonly charge triple-digit interest. The CFPB rules would do nothing to protect borrowers from these loans, Bourke said.

"Payday loan reform is urgently needed, but without changes, the CFPB's draft regulation misses the mark," he said. "Pew's research shows that borrowers want three things: lower prices, manageable installment payments and quick loan approval. The CFPB proposal goes 0 for 3."

The draft payday rules could see significant revision. The CFPB will now put the proposal, which was unveiled Thursday in Kansas City, out for a 90-day public comment period. The bureau is expected to formally adopt regulations by early next year.