Stepping gingerly into one of the finance industry's longest-running controversies, the Consumer Financial Protection Bureau said Thursday that it has begun shaping rules to govern payday loans and other small, short-term credit offered at triple-digit interest rates - products that consumer advocates have for years labeled debt traps.
The agency's announcement - quickly embraced by President Obama, blasted by lenders' lobbyists, and hesitantly welcomed by advocacy groups - was long foreseen. The 2010 Dodd-Frank law establishing the new bureau gave it specific authority to regulate payday loans, which are otherwise overseen by the three dozen states that permit them.
That list does not include Pennsylvania or New Jersey. Even so, borrowers across the country have access to Internet-based lenders, often associated with companies based on Native American lands that claim exemption from state rules - a practice that recently prompted Pennsylvania to sue Texas-based Think Finance Inc.
A White House fact sheet called the Consumer Financial Protection Bureau's rule-making plan "an important first step toward writing rules to help prevent abuses in payday lending and protect consumers from getting trapped in expensive cycles of debt and fees."
The CFPB "is uniquely positioned to take this action," Obama press secretary Josh Earnest said in a conference call with journalists, scheduled to discuss what he called a range of pro-middle-class initiatives under fire by lobbyists and congressional Republicans - also a theme of a speech by Obama on Thursday in Birmingham, Ala.
The CFPB's funding, provided by the Federal Reserve under Dodd-Frank and not subject to congressional appropriations, is among the targets of a budget plan passed Wednesday by the GOP-led House.
"Republican efforts to undermine the CFPB are nothing more than attempts to undermine middle-class families all around the country," Earnest said.
Reining in payday lending promises to be a complicated process for the agency, which is required to seek industry feedback before starting the rule-making process. The agency called Thursday's announcement a "preliminary outline," and sought to put payday lending into the broader context of reckless lending blamed for fueling the 2008 financial crisis.
"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," 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."
The CFPB said it wants to address a range of short-term credit products generally due in full within 45 days, including not just payday loans but deposit-advance products, some car-title loans, and some open-end lines of credit. It suggested that lenders might be offered two paths - "debt trap prevention" or "debt trap protection" - to avoid putting borrowers at unlawful risk.
Industry lobbyists accused the agency of not basing its proposals on adequate research or an understanding of the market.
"The CFPB has not considered what happens when a customer walks into a store and can't get credit when they need it most," said Dennis Shaul, who heads the Community Financial Services Association of America. "Payday loans represent an important source of credit for millions of Americans who live from paycheck to paycheck."
But consumer advocates warned that the CFPB's "protection" alternative could be too light-handed, not too heavy-handed.
"They're putting all the right elements on the table," said Nick Bourke, who heads the small-dollar loan project at the Pew Charitable Trusts. "But they've got one proposal on the table that could create a huge loophole."
Bourke said that enforcing ability-to-repay standards is crucial to any payday-loan rule's effectiveness.
He said the average payday-loan payment takes about 36 percent of a borrower's next paycheck - one reason that Pew has found that about 80 percent of payday loans are taken out within two weeks of a previous loan "to cover a shortfall that the earlier loan created."
"Pew's research has found that most payday borrowers can afford to pay no more than 5 percent of their income on a payday loan," he said.