WASHINGTON -- The nation's top consumer financial watchdog on Thursday issued tough nationwide regulations on payday loans and other short-term loans, aiming to prevent lenders from taking advantage of cash-strapped Americans.
The long-awaited rules from the Consumer Financial Protection Bureau would require lenders in most cases to assess whether a consumer can repay the loan.
"The CFPB's new rule puts a stop to the payday debt traps that have plagued communities across the country," said Richard Cordray, the bureau's director. "Too often, borrowers who need quick cash end up trapped in loans they can't afford. The rule's common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail."
The bureau has been overseeing the $38.5 billion-a-year payday lending industry since 2012, the first such federal oversight.
The centerpiece of the new rules is a full-payment test that lenders would be required to conduct to make sure the borrower could afford to pay off the loan and still meet basic living expenses and major financial obligations, the bureau said.
The rules limit the number of loans that could be made in quick succession to a specific borrower to three.
Consumers would be allowed to take out a short-term loan of as much as $500 without a full repayment test if the loan is structured to allow the borrower to get out of debt more gradually, such as allowing for payments to go directly to principal. Such loans could not be offered to borrowers with recent or outstanding short-term or balloon-payment loans.
The rules won't go into effect until mid-2019 and are strongly opposed by most Republicans. The five-year term of Cordray, who was appointed by President Barack Obama, expires in July 2018, and he could leave sooner to run for governor in his home state of Ohio.
President Donald Trump would nominate a replacement who could move to rescind the rules before they ever go into effect.
Payday and other short-term loans, such as those secured with an automobile's title, have been a fixture in lower-income and working-class communities for years. Their use surged during the Great Recession and its aftermath as struggling consumers looked for quick infusions of cash to pay bills.