By Emily Stephenson and Julia Edwards
WASHINGTON (Reuters) - The U.S. consumer financial watchdog on Thursday outlined its plans for cracking down on the payday lending industry and ensuring that borrowers can repay their loans.
The framework unveiled by the U.S. Consumer Financial Protection Bureau was a key step toward new rules for various types of loans that regulators say trap borrowers in debt.
President Barack Obama is expected to tout the progress the young agency has made in shielding the middle class from unfair financial practices in a speech on Thursday in Birmingham, Alabama.
Payday loans are small-dollar extensions of credit that borrowers agree to repay in a short time, such as when they next receive a paycheck. Similar products include car title loans, in which borrowers use vehicles as collateral, and installment loans, which can be longer-term and are paid back in larger amounts.
Lenders who offer the products say they help people who are strapped for cash. But consumer advocates say borrowers often roll over or refinance loans rather than paying them back, racking up debt due to high interest rates and fees.
"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 in a statement.
"The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans."
The framework gives lenders two compliance options. They could verify prospective borrowers' income and debt history to guarantee they can repay loans, or they could offer cheap repayment options and limit how many loans people may take out.
The requirements are tailored so that slightly different rules apply to short-term loans, which must be repaid within 45 days, versus those stretching longer.
Even before the framework was released, lenders warned the consumer bureau to take care not to disrupt access to credit or hurt small businesses.
"Consumers thrive when they have more choices, not fewer, and any new regulations must keep this in mind," the Community Financial Services Association of America, which represents short-term lenders, said in a statement on Wednesday.
Lawmakers created the CFPB as part of the 2010 Dodd-Frank financial oversight law. A CFPB spokesman said a formal proposal could come later this year.
A comment period for the public and the industry would follow, after which the rules could be finalized.