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New U.S. rule on payday loans to hurt industry, help banks: agency

New U.S. rule on payday loans to hurt industry, help banks: agency
From Reuters - October 5, 2017

WASHINGTON (Reuters) - Revenues for the $6 billion payday loan industry will shrivel under a new U.S. rule restricting lenders ability to profit from high-interest, short-term loans, and much of the business could move to small banks, according to the countrys consumer financial watchdog.

The Consumer Financial Protection Bureau (CFPB) released a regulation on Thursday requiring lenders to determine if borrowers can repay their debts and capping the number of loans lenders can provide to a borrower. The rule will take full effect in roughly two years.

Mostly low-income earners use what are known as payday loans -- small-dollar advances typically due to be repaid on the borrowers next payday and generally used for emergency and other expenses. Payday lenders generally do not consider traditional credit reports for loan eligibility.

Under the new rule, the industrys revenue will plummet by two-thirds, the CFPB estimated.

The current business model relies on borrowers needing to refinance or roll over existing loans. They pay fees and additional interest along the way that plump lenders profits, CFPB Director Richard Cordray said on a call with reporters.

Lenders actually prefer customers who will re-borrow repeatedly, he said.

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