The government's consumer watchdog is cracking down on payday loans.
The Consumer Financial Protection Bureau announced Thursday it has finalized rules targeting the payday lending industry. Rates on such short-term loans can top 390 percent, and struggling borrowers often reborrow, piling on fees and interest.
That combination can create a debt trap that's tough to get out of, advocates say.
"Too often, borrowers who need quick cash end up trapped in loans they can't afford," CFPB director Richard Cordray said in the announcement. "The rule's common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail."
Under the rule, lenders will need to conduct an upfront "full-payment" test to determine if borrowers will be able to afford to repay the loan without compromising other financial obligations. Other protections include access to alternative loans for borrowers who don't meet those requirements.
The CFPB rules are the first nationwide regulation of the payday lending industry.
"There's a lot of variation state to state," said Bruce McClary, a spokesman for the National Foundation for Credit Counseling. "Any step toward uniformity is a win for consumers, for people to know what to expect no matter where they live."
Yet the measure's future is uncertain. Last month, Reuters reported that industry lobbyists and Republican lawmakers were "gearing up for battle" over the regulation. There's also legislation in play that would curtail the CFPB's rulemaking power and roll back other consumer protections it has already finalized.
Consumer advocates hailed the payday lending rule as a good first step, with more needed.
"The rule is an important first step and will benefit some consumers who need relief the most, but a great deal of work is still needed to ensure that American families are no longer ensnared in the debt trap of high interest, abusive loans," Michael Best, director of advocacy outreach at Consumer Federation of America, said in a statement.
Although the proposed rules had included longer-term payday loans, the CFPB is still studying that market and did not include it in the final rule, said Lauren Saunders, associate director of the National Consumer Law Center.
"Payday lenders are moving into long-term payday loans that are an even deeper and longer debt trap than short-term loans, so the CFPB must move quickly to address these predatory loans," she said in an emailed.
Even with the new protections, payday loans should still be "loans of last resort," said McClary.
"It is still important for people to think of any other alternative they can to avoid having to turn to a financial product that is the most expensive, and often the most difficult to repay," he said.