U.S. Consumer Watchdog will regulate payday loans

Payday loan providers will be under new regulations according to a statement issued by U.S. Consumer Financial Protection Bureau. The new framework will ensure that borrowers are not trapped in debt cycle and pay exorbitant interest rates.

The U.S. consumer financial watchdog director Richard Cordray said that many short term loans are made not checking the borrower’s ability to repay but lenders ability to collect the money back. Payday loans usually involve small amount for a short tenure. Borrowers agree to repay the loan in a short time, usually when they receive their paycheck. However, the interest rates are generally very high for these loans.

Payday loan industry has grown in the last few years as many cash strapped Americans look for ways to make the both ends meet. Most of the borrowers rollover the loans or refinance them. In many cases, consumer continues to pay high interest rate and is not able to come out of the debt cycle.

CFPB Director Richard Cordray said, "The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. Too many short-term and longer-term loans are made based on a lender's ability to collect and not on a borrower's ability to repay."

Under the new framework, lenders will have two compliant options. They will have to either check debt history and income of the borrower or they could offer cheap repayment option to consumers.

Lenders asked the consumer financial watchdog to be careful about not disrupting the small credit market, which could leave many people without options for small tenure loans. Payday loan industry has been regulated on the state level.

A formal CFPB proposal could come later this year.