New rules limiting payday lending coming soon

The Associated Press reports that federal regulators are currently drafting rules to regulate payday lending that may be available early this year. For payday loans, the borrower generally writes a personal check to the lender dated on their next payday, and the lender charges both interest and fees. These loans are often provided to low-income individuals who need cash quickly. The Consumer Financial Protection Bureau (CFPB) reports that this often turns into a “debt trap” for borrowers, with multiple, frequent loans and exorbitant interest rates and fees. According to the article, the annual percentage rate on payday loans often tops 300% as opposed to the APR on credit cards which generally ranges from 12-30%.

The new regulations would aim to create more stringent checks on the ability of borrowers to repay loans, including potentially requiring credit checks and limiting the number of times a borrower could take a loan, as well as incentivizing states or lenders to lower interest rates. The regulators would be acting under the 2010 Dodd-Frank Act, which gave the CFPB authority to regulate payday lending. The Act does not allow them to cap interest rates directly.

Ohio had passed a law capping interest rates for payday loans at 28% in 2008, but an Ohio Supreme Court case last year upheld a loophole in the law, allowing lenders to escape the restrictions by registering under the Mortgage Lending Act instead of the Short Term Loan Act.