Federal Regulators to Crack Down on Payday Loans

WASHINGTON -- Federal regulators are proposing tight restrictions on so-called "payday lenders" who make high-interest loans to financially strapped customers.

Payday loan borrowers are usually low-income individuals. The borrowers are often caught in a "debt trap," taking out the initial loan and then borrowing more money to pay off the original debt. In some cases, interest rates from payday loans can be as high as 700 percent.

The new rules being proposed Thursday by the Consumer Financial Protection Bureau would do the following:

• Force lenders to verify that borrowers have the ability to repay the money in two weeks, which is when most loans are due.

• Require that customers be notified before an attempt to debit their bank accounts.

• Restrict the number of debit attempts to limit overdraft fees.

• In addition, regulators are proposing a ban on using auto title loans as collateral.

Regulators are hopeful the new rules will help people like Elliott Clark. The former Marine made headlines when he took out a payday loan for $2,500 to cover his family's financial crunch after a medical emergency. After five years, Clark ended up paying more than $50,000 in interest.

Despite an average credit score, Clark was unable to secure a loan from a bank or credit union.

"If it's too good to be true, it usually is. But when you're in a bind, a situation that you can't get out of, you grasp at straws to keep your head above water to try and survive," he told WDAF-TV.

Clark's story is all too common. An unexpected financial emergency can quickly turn into a massive debt. 

A survey by the Federal Reserve Board asked American families how they would cover a $400 emergency. Forty-six percent said they would "struggle" to cover the expense. 

Meanwhile, the CFPB is seeking the public's feedback on the proposals before final regulations are issued. Comments are due by Sept. 14.