Federal Rules for Small Loans

In June, the Consumer Financial Protection Bureau (CFPB) released a proposed rule to regulate payday, auto title, and some high-cost installment loans. The proposal applies to “covered loans” from any lender, including payday, auto title, online, and nonbank installment lenders as well as banks and credit unions, but not to overdraft services, pawn loans, business loans, and other types of credit.

The payday loan market is past due for reform. Implemented correctly, new regulatory standards will help payday loan borrowers by making these loans safer and more affordable, as well as pave the way for better, lower-cost installment loans from banks.

Proposed regulations from the Consumer Financial Protection Bureau (CFPB) would protect consumers from conventional, lump-sum payday loans, which Pew’s research has shown usually have unaffordable payments that trigger reborrowing. The pending rule strongly encourages payday and auto title lenders to give borrowers more time to repay loans in smaller installments, rather than large lump-sum payments.

The Consumer Financial Protection Bureau (CFPB) is preparing the first federal regulations for payday and similar loans. This is propelling a shift in the market away from the conventional payday loan model, which has led to serious harm because the loans must be paid off after two weeks in a single payment that consumes about one-third of the typical borrower’s next paycheck. Instead, small-loan lenders are increasingly using installment loan models in which borrowers settle over a period of months. Although longer-term loans generally work better for borrowers, they can be harmful without additional regulatory protections. Whether borrowers would fare better under these new types of longer-term loans would depend on the strength and clarity of the CFPB’s pending rules.