WASHINGTON/ BIRMINGHAM (Reuters) - A U.S. consumer financial watchdog on Thursday outlined plans to crack down on payday lending practices that leave borrowers with debt they cannot repay, and President Barack Obama touted the move as a contrast with Republican polices.
Obama told an audience at a community college in Birmingham, Alabama, that the U.S. Consumer Financial Protection Bureau’s plan would protect consumers while Republicans are seeking to unravel such financial safeguards.
“If you lend out money, you have to first make sure that the borrower can afford to pay it back,” Obama said.
Payday loans are small extensions of credit that borrowers agree to repay in a short time, such as when they next receive a paycheck. Similar products include car title loans, in which borrowers use vehicles as collateral, and installment loans, which can be longer-term and are paid back in larger amounts.
Lenders who offer the products say they help people who are strapped for cash. But consumer advocates say borrowers often roll over or refinance loans rather than paying them back, racking up debt due to high interest rates and fees.
Republicans in the U.S. House of Representatives are seeking to weaken the consumer watchdog agency by rolling back the Wall Street reform that established it after the 2008 financial crisis.
Obama said he would veto legislation that would unravel that reform.
The framework gives lenders two options. They can verify prospective borrowers’ income and debt history upfront, or they can offer cheap repayment options and limit how many loans people may take out.
Even before the framework was released, lenders warned the consumer bureau not to disrupt access to credit.
“Consumers thrive when they have more choices, not fewer, and any new regulations must keep this in mind,” the Community Financial Services Association of America, which represents short-term lenders, said in a statement on Wednesday.
A CFPB spokesman said a formal payday proposal could come later this year. A comment period for the industry would follow, after which the rules could be finalized.
Shares of consumer lenders dropped on Thursday. Enova International Inc (ENVA.N) shares were down 14.4 percent, First Cash Financial Services (FCFS.O) was down 2.2 percent and Cash America International Inc CSH.N was down 3.9 percent.
Reporting by Emily Stephenson and Julia Edwards; Editing by Dan Grebler, W Simon, Bernard Orr and David Gregorio