The battle for the payday lending industry begins

The battle over a proposed new payday loan rule began on Thursday, with supporters saying it would protect needy borrowers and opponents warning it would reduce access to credit and threatening legal action.

The rhetorical skirmishes began when the Consumer Financial Protection Bureau released a plan that would require providers of payday loans, auto title loans and other small dollar advances to determine the ability of their borrowers to repay short debts. term that can have annual interest rates as high as 390%.

The plan, open for public comment until Sept. 14, would simultaneously prevent lenders from making repeated attempts to debit delinquent borrower accounts, a tactic that adds new fees and charges to loans. The CFPB has also launched an investigation into open-ended lines of credit and the tactics used by lenders to seize salaries, vehicles or other personal property of borrowers who fail to meet repayment deadlines.

The proposal has an influential chief endorser. President Obama used a March 2015 speech to say that a payday lender “should first make sure the borrower can afford to pay it back.”

Obama pushes back payday loan rules in Alabama

“We made it clear that the credit products marketed to these consumers should help them, not hurt them,” CFPB director Richard Cordray said at a hearing in Kansas City, Missouri on Thursday. “And our research has shown that too many of these loans trap borrowers with debt they can’t afford.”

Cassandra Gould, minister and representative of Missouri Faith Voices, agreed. One of dozens of speakers at the hearing, she spoke of a professional woman who got a payday loan to cover a car repair, but couldn’t pay it off in full weeks later when the loan has expired. According to Gould, the lender debited the woman’s account 15 times in one day, triggering a spiral of debt that ultimately cost the borrower her apartment.

“The debt trap is more like a death trap,” Gould said.

Calling the proposal an “important step in the right direction,” Wade Henderson, chair of the Leadership Conference on Civil and Human Rights, urged the CFPB to go further, limiting initial loan fees and preventing lenders from transferring. loans to other suppliers.

In contrast, representatives of the payday loan industry have warned that requiring lenders to assess borrowers’ ability to repay would increase business costs. In turn, these increases could force some companies to abandon payday loans and send borrowers to loan sharks or other unregulated lending sources, they warned.

New CFPB proposal targets “payday debt traps”

The proposed rule could affect access to credit for about 30% of the U.S. population, said Bill Himpler, executive vice president of the American Financial Services Association, which represents traditional installment lenders. Despite complaints about predatory lending, other business officials said payday and other short-term loans remain popular with consumers and have a relatively low percentage of borrower complaints.

The Community Financial Services Association of America, a national group in the breakdown industry, will use the comment period to lobby for changes to the CFPB’s proposal, CEO Dennis Shaul said. If that fails, the organization plans stronger action.

“If the rule emerges substantially as it is this morning, then we will sue,” Shaul said.

Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc