Payday lenders won't have to check whether borrowers can afford loans

Payday lenders won't have to check whether borrowers can afford to repay their high-interest loans under a new rule from the Consumer Financial Protection Bureau. Its director, Kathleen L. Kraninger, said the new provision will provide "access to credit from a competitive marketplace."

The rule reflects a rollback of a 2017 provision conceived by the Obama administration that was designed to protect consumers from taking out expensive payday loans, which can carry interest rates as high as 400%. By comparison, credit cards offer rates between 12% to 30%. With the new rule, lenders will no longer be required to "reasonably" determine whether a consumer can repay the loan in a timely manner. 

Some lawmakers hailed the new rule as a benefit to consumers, with Republican Rep. Patrick McHenry of North Carolina saying that it will help "families in need have access to every option to cover unexpected costs." 

But consumer advocates said it could hurt some consumers, especially people of color, who have less access than White households have to traditional lending services and a history of tapping what are meant to be short-term payday loans charging higher rates. That could be doubly harmful during the current recession and the economic stresses that many households are experiencing during the pandemic, they added.

"At a time of unprecedented financial challenges, the CFPB has rolled back much-needed, yet insufficient, consumer protections, making it even easier for payday lenders to trap Americans in a devastating cycle of debt," Rachel Gittleman, Financial Services Outreach Manager with the Consumer Federation of America, said in a statement. 

She added, "The 'ability-to-repay standard' was an important, modest step to ensuring that Americans could afford to repay the loan along with sky-high interest rates imposed by payday lenders."

The new rule "green-lights predatory payday loans amid [the] COVID-19 pandemic," consumer advocacy organization U.S. PIRG said in a statement.

"At risk"

The Obama-era rule that required lenders to determine a borrower's repayment ability had prompted many payday lenders to switch gears and offer installment plans, according to the Pew Charitable Trusts. Instead of requiring repayment in full within days or weeks when the next paycheck cleared, installment loans provide more flexibility and can save borrowers money on interest. 

"The 2017 rule curbed small loans with balloon payments and encouraged mainstream lenders to offer affordable installment loans," Alex Horowitz, senior research officer with Pew's consumer finance project, said in a statement. "Today's action puts all of that at risk."

Black Americans are twice as likely as other races to take out payday loans, a Pew study found. Other groups that are more likely to rely on these expensive loans are renters, households earning less than $40,000 a year, people without college degrees and separated or divorced households.

Instead of turning to payday loans to make ends meet, consumers should instead seek out credit unions, which can provide lower-interest loans than commercial lenders, or even ask friends and family for help, said Mike Litt, U.S. PIRG consumer campaign director. 

"Reach out to each company or person you owe money to and explain that you need help because of the coronavirus," Litt said. "Doing so might help you delay or reduce your monthly payments, or avoid interest and late fees."