(MENAFN - AFP) The US government proposed Thursday a rule to protect consumers from payday debt traps that includes requiring lenders to make sure borrowers have the ability to repay their loans.
The proposal by the Consumer Financial Protection Bureau marks the first time the federal government has moved to regulate payday lending, which is outside the banking sector and generally overseen by states.
In addition to payday loans -- small-money advances typically due to be repaid from the next paycheck -- the CFPB proposal covers other credit products such as auto-title loans in which the car or truck is put up as collateral.
"Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt," said CFPB Director Richard Cordray in a statement.
"It's much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey."
According to the CFPB, about 16,000 payday loan businesses operate in the 36 states, and the number of online outlets is expanding.
The proposed standards would prevent payday lenders from using predatory tactics to succeed in setting up financially vulnerable borrowers to fail, the agency said.
The finance charge on payday loans is much higher than regular bank loans or credit cards. According to the CFPB, a typical two-week payday loan charges $15 for every $100 lent. That equals an annual loan rate of nearly 400 percent, while credit cards typically charge from 12 percent to 30 percent.
To keep up with high interest payments, borrowers often resort to new loans and more finance charges, turning it into a long-term debt trap.
Under the proposed rule, lenders would be required to evaluate whether the borrower can afford the full amount of each payment when it is due and still be able to cover basic living expenses and major financial obligations.
Other provisions include making it difficult for lenders to push strapped borrowers into reborrowing or refinancing the same debt, and capping the number of short-term loans that can be made in quick succession.
The CFPB said public comments on the proposed rule were due on September 14 and would be weighed before final regulations are issued.
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