(Bloomberg) -- The deregulatory winds blowing through Washington aren't benefiting the $3.6 billion payday-loan industry, as the U.S.'s top consumer watchdog issued rules Thursday that will dramatically change how many companies providing expensive credit to cash-strapped borrowers do business.
The Consumer Financial Protection Bureau regulations require that payday lenders determine upfront whether customers can repay their loans without having to seek further financing. The rules apply to financial products that are automatically paid out of consumers' bank accounts and paychecks, and can carry annual interest rates exceeding 300 percent.
“The CFPB's new rule puts a stop to the payday debt traps that have plagued communities across the country,” CFPB Director Richard Cordray said in a statement. “Too often, borrowers who need quick cash end up trapped in loans they can't afford. The rule's common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”
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The payday regulations are the second major rulemaking effort Cordray has finished since June, bucking the Trump administration's often-stated goal of loosening businesses constraints. The White House blames government-imposed red tape for stifling economic growth.
Cordray Resigning?
The completion of the payday rules will probably add to speculation that Cordray -- an appointee of former President Barack Obama -- is wrapping up his top priorities in preparation for running for governor as a Democrat in his home state of Ohio. Washington lobbyists and lawmakers have been predicting for months that he will soon resign.
While Cordray held a call with reporters Thursday to discuss the payday regulations, he avoided any queries about his possible political ambitions by not taking questions.
The CFPB constraints -- the first federal regulations for the payday industry -- limit how often indebted consumers can obtain short-term loans and how much money they can borrow. The agency's rules apply to businesses, including banks and auto lenders, that issue loans with high interest rates that typically have to be repaid within two to four weeks.
A key component is that companies have to conduct a “full-payment test” before issuing loans to assess whether customers can repay, while still being able to meet their basic living expenses and major financial obligations.
Debt Trap
Consumer advocates say tougher rules are needed because lenders often prey on desperate borrowers who are living paycheck to paycheck by trapping them in debt.
“Payday and car title lenders profit from repeatedly dragging hard-pressed people deeper and deeper into debt, and taking advantage of families when they are financially vulnerable,” Lisa Donner, the Americans for Financial Reform's executive director, said in a statement. “Curbing the ability to push loans that borrowers clearly cannot repay is a key protection.”
Finance companies and the CFPB's Republican critics in Congress say the crackdown will ultimately hurt needy consumers who will have fewer options for accessing credit as a result.
“The CFPB whiffed at an opportunity to provide assistance to the millions of Americans experiencing financial hardship,” Consumer Bankers Association Chief Executive Officer Richard Hunt said.
Big Revenues
Payday lenders generate about $3.6 billion a year in revenue, according to a CFPB study. Its rules would likely decrease loan volume, forcing a number of companies to dramatically change how they do business.
While Cordray's CFPB term doesn't end until July 2018, he could step down earlier to enter the Ohio governor's race.
As his time running the CFPB draws to a close, he's continued to be a thorn in the financial industry's side. Cordray spearheaded rules in July that restrict lenders from forcing customers to resolve disputes through arbitration, potentially making it easier for consumers to sue their banks. Republican lawmakers and lobbyists have complained he's inappropriately rushing to finish controversial regulations before he leaves.
--With assistance from Jesse Hamilton
To contact the reporter on this story: Elizabeth Dexheimer in Washington at edexheimer@bloomberg.net.
To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Gregory Mott
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