Consumer advocates are praising a new rule issued last week by the Consumer Financial Protection Bureau. It requires payday lenders to start verifying a borrower’s ability to repay the loan before rolling it over into a new loan.

The rule aims to prevent a situation where desperate people borrow more money just to repay prior loans, and get hit with fees that often exceed the amount of the original loan. Ginger Haggerty, asset development program and policy coordinator with the Midas Collaborative, said state caps on loan rates make Massachusetts an unattractive market for payday lenders, but the new rule will help protect locals from out-of-state loan products.

“Any payday loans coming into the state via the internet, or even people who are driving up to New Hampshire or other states that allow it, any payday loan that Massachusetts residents can access can have ability-to-repay requirements,” Haggerty said.

The new rule goes into effect in July 2019. It requires payday lenders to verify specifically that the person will be able to repay the loan and still cover living expenses and major financial obligations. Payday-loan industry supporters argue that this type of short-term loan offers credit and flexibility to people in financial distress.

Diane Standaert, director of state policy at the Center for Responsible Lending, said this rule will curb some serious industry abuses nationwide.

“We know that the debt trap of repeat re-lending is the core of the payday-lender and car-title lender business model,” Standaert said. “So, that’s why this rule is a significant step forward in stopping the debt trap of unaffordable payday loans.”

Conservatives in Congress are expected to try to repeal the rule using the Congressional Review Act before it even goes into effect. And in 2018, President Trump will get the chance to nominate a new head of the Consumer Financial Protections Bureau. The current director, Richard Cordray, is a holdover from the Obama administration whose term ends next summer.

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MIKE CLIFFORD

Mike Clifford is a reporter for the Commonwealth News Service.

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