Business

Payday lending faces tough new restrictions by consumer agency

NEW YORK — A federal agency on Thursday imposed tough new restrictions on payday lending, dealing a potentially crushing blow to an industry that churns out billions of dollars a year in high-interest loans to working-class and poor Americans.

The rules announced by the Consumer Financial Protection Bureau are likely to sharply curtail the use of payday loans, which critics say prey on the vulnerable through their huge fees.

Currently, a cash-strapped customer might borrow $400 from a payday lender. The loan would be due two weeks later — plus $60 in interest and fees. That is the equivalent of an annual interest rate of more than 300 percent, far higher than what banks and credit cards charge for loans.

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Because most borrowers cannot repay their debts quickly, the loans are often rolled over, entangling those who take them in hard-to-escape spirals of ever-growing debt.

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The new guidelines pit the consumer bureau, an independent watchdog created in the aftermath of the financial crisis, against Congress and President Donald Trump, who has made rolling back business regulations a centerpiece of his agenda. The bureau has aggressively pursued new regulations and enforcement actions since Trump took office, even as other agencies loosened the reins on the industries they monitor.

The payday-lending industry is vast. There are now more payday loan stores in the United States than there are McDonald’s restaurants. The operators of those stores make around $46 billion a year in loans, collecting $7 billion in fees. Some 12 million people, many of whom lack other access to credit, take out the short-term loans each year, researchers estimate.

Lenders argue that the loans provide financial lifelines to those in desperate need of cash, and that the high fees and interest rates are justified by the failure of so many borrowers to repay the loans.

The new federal rules limit how often, and how much, customers can borrow. The restrictions, which have been under development for five years, are fiercely opposed by those in the industry, who say the measures will force many of the nation’s nearly 18,000 payday loan stores out of business.

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“These protections bring needed reform to a market where far too often lenders have succeeded by setting up borrowers to fail,” Richard Cordray, the consumer bureau’s director, said during a call with reporters to discuss the rule.

Until now, payday lending has mainly been regulated by states, 15 of which already have already made the loans effectively illegal. In more than 30 other states, though, the industry is thriving.

Industry officials said Thursday that they would file lawsuits to block the rules from taking effect in 2019 as scheduled.

The new restrictions “will create credit deserts for many Americans who do not have access to traditional banking,” said Edward D’Alessio, executive director of Financial Service Centers of America, an industry trade group. D’Alessio said his group was exploring every possible avenue to abolish the rules.

Cordray is a holdover from the Obama administration whose aggressive pursuit of rules meant to curb what he views as reckless and predatory financial activity has made him a reviled figure in banking circles and a hero of consumer advocates.