WASHINGTON – The Obama administration will announce Thursday the federal government’s first move to regulate high-interest, low-dollar “payday loans,” a $38.5 billion market currently left to the states.
The crackdown on the payday industry—largely storefront lenders extending credit to 12 million lower-income households paycheck to paycheck—follows a series of actions by President Barack Obama and his aides to cement a change in the balance of power between consumers and financial institutions during their last year in office.
The payday rule, proposed by the Consumer Financial Protection Bureau (CFPB), imposes a complex set of requirements on the payday industry, mandating that lenders assess a borrower’s ability to repay and making it harder for lenders to roll over loans—a practice that often leads to escalating borrowing fees—or to take fees out of a borrower’s bank account.
The payday rule comes a month after the CFPB finalized a proposal to make it easier for consumers to file class-action lawsuits against financial institutions, by barring mandatory arbitration. A month before that, the Labor Department announced a plan to overhaul retirement-savings advice, stoking ire from the industry and prompting a lawsuit this week from big-business trade groups seeking to overturn the measure.
The CFPB plans to roll out in the coming months new rules governing prepaid cards, bank overdraft fees and debt collection. The agency indicated in this week’s payday announcement that still more rules are coming for that sector, saying it was “launching an inquiry into other potentially high-risk loan products and practices that are not specifically covered by the proposed rule.”