New rules proposed for payday loans (CreditCard.com)

By Fred O. Williams

The nation's consumer financial protection cop unveiled new restrictions for payday loans and other forms of short-term credit, in a move to stop emergency loans from turning into debt traps

he U.S. Consumer Financial Protection Bureau held a public hearing Thursday as a backdrop for its proposals, which include limits on loan rollovers, freezes on new loans and limits on how lenders tap borrowers' bank accounts. The proposals apply to auto title loans, deposit advances and high-rate installment loans as well as payday loans

"Consumers should be able to use these products without worrying that they will end up stuck in a deep hole with no way out," CFPB Director Richard Cordray said at the hearing in Richmond, Virginia. President Obama applaunded the payday restrictions in a speech Thursday in Birmingham, Alabama, saying lenders that profit by setting debt traps "need to find a new way of doing business."

Payday loans common

Between 12 million and 19 million U.S. households use the short-term loans at least once a year, estimates say, from strip-mall storefronts or online payday lenders. A typical $300 payday loan costs $45 and lasts about two weeks, for an annualized interest rate of more than 300 percent.

"I started out with a $300 loan from LoanMax title loan," Richmond-area resident Kia Johnson said at the CFPB hearing. "Over a period of time they took the vehicle, and I have received a letter saying I have a $5,000 and some balance."

The proposals for broad restrictions address a top concern of consumer advocates. With their high interest rates and a pipeline into your next paycheck, payday loans and other costly forms of credit sap resources from entire communities of cash-strapped households, opponents say.

"Payday loans are one of the worst predatory loan products on the market today," said Lauren Saunders, managing attorney at the National Consumer Law Center.

A 2013 study by the CFPB found that 13 percent of payday borrowers studied were able to limit their trips to the well to one or two visits per year. However, another 48 percent of borrowers took out more than 10 payday loans a year. These repeat borrowers generated three-quarters of total fees, showing that cyclic debt is important to the payday loan industry's financial structure.

"If you have a regular gap between your income and expenses, taking on debt is not the answer," Saunders said.

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