iStock_000010878337MediumLast week, the Consumer Financial Protection Bureau (CFPB) announced that it was considering new rules for payday lending, the practice of making relatively short-term, high-interest loans to borrowers. According to NPR, millions of Americans rely on payday loans every year, and payday lending is now a $46 billion-per-year industry. See Payday Loan—and Endless Cycles of Deb—Targeted by Federal Watchdog, National Public Radio, Mar. 26, 2015. The CFPB has expressed concerns about low-income borrowers getting trapped in a cycle of debt from which they cannot escape, and the rules that the CFPB is considering represent the CFPB’s attempt to provide safeguards for these borrowers. Under the new rules that the CFPB is considering, traditional payday loans, deposit advance products, vehicle title loans, high-cost installment loans, and open-end lines of credit all would be subject to new regulations. For short-term loans (which the CFPB is considering defining as those that must be repaid within 45 days), lenders would have to meet either of two sets of rules. First, new “debt-trap prevention requirements” would require lenders to determine at the outset that a borrower could repay the loan when due, including principal, interest, and fees. In making this determination, lenders would have to verify a borrower’s income, financial obligations, and borrowing history. Related rules would require a “cooling off” period of 60 days between loans or require a lender to document that a borrower’s financial situation has improved enough in that time to permit repayment of the second loan without taking out another loan. Second, a lender could comply with “debt-trap protection requirements.” This requirement would prohibit lenders from making too many consecutive short-term loans to a borrower and would require lenders to offer a borrower affordable repayment options. These rules would specifically prohibit a loan that is over $500 from having a term longer than 45 days, carrying more than one financial charge, or requiring a borrower’s vehicle as collateral. Additionally, a borrower could not have any outstanding loan with another payday lender, and rollover payday loans would be capped at two before the mandatory 60-day “cooling off” period. For longer-term loans (those with terms longer than 45 days) in which the lender has access to repayment from a borrower’s deposit account or paycheck, holds a security interest in a borrower’s vehicle, or has an interest rate of more than 36 percent, the CFPB is proposing rules that would require lenders, as with shorter-term loans, to determine that a borrower is capable of repaying the entire loan. Adopting a similar framework of requiring lenders to comply with either “debt-trap prevention requirements” or “debt-trap protection requirements,” a lender would have to make determinations like those for short-term loans, but with different numbers and timeframes, given the larger amounts and longer terms of these loans. The CFPB also is considering rules to restrict harmful payment-collection practices by payday lenders that often involve lenders trying to collect payments from postdated checks, debit authorizations, and remotely created checks. Under the CFPB’s proposed rules, a lender would be required to provide a borrower three days’ notice before submitting a transaction to the borrower’s bank or credit union in an attempt to collect payment on the loan. The new rules also would limit the number of unsuccessful withdrawal attempts that a lender could make before being required to obtain a new authorization from the borrower. The CFPB is currently seeking input on the rules from lenders. You can learn more about these proposed payday lending rules from the CFPB’s factsheet.