Sen. Elizabeth Warren addresses the 10th annual Make Progress National Summit on July 16, 2015 in Washington, DC. | Getty Warren wing clashes with Wasserman Schultz on payday lending

Federal regulators Thursday unveiled rules that could mean a death sentence for the payday-lending industry, a cause that has already sparked infighting between mainstream Democrats like Debbie Wasserman Schultz and the party’s Elizabeth Warren wing.

The industry has surged over the past decade as millions of Americans struggle just to cover ordinary living expenses. Yet critics have long accused the lenders of trapping lower-income workers — often single women and minorities, a core Democratic constituency in an election year — in a cycle of borrowing at exorbitant interest rates.


The Consumer Financial Protection Bureau will discuss the rules at a hearing in Kansas City, Missouri — a state where storefront lenders outnumber McDonald’s and Starbucks franchises. Among the measures are limits on how frequently borrowers can get payday loans and a requirement that lenders verify that people can repay the money without taking on new debt, avoiding the so-called debt trap.

The rules come after more than three years of furious lobbying by both consumer advocates and the industry, which spent $3.6 million last year alone. Payday lenders say they provide a lifeline for many borrowers facing emergencies who are cut off from other funding sources.

The debate has spawned bipartisan legislation backed by Wasserman Schultz to delay the new rules for two years, a move that she says would give states time to adopt stricter laws. That stance has drawn attack ads by opponents of the industry. Allied Progress, a liberal group, recently launched a $100,000 ad campaign against Wasserman Schultz, the Democratic National Committee chair who faces a primary challenge this year in her South Florida congressional district. The group cites the $68,100 in contributions she has gotten from payday lenders since 2006.

The legislation also invited a sharp rebuke from Warren, (D-Mass.), the architect of the CFPB.

“When emergencies arise people need access to credit, but payday lenders that build business models around trapping people in a never-ending cycle of debt are throwing bricks to a drowning man,” Warren said at a Senate Banking Committee hearing in April.

The bill, authored by Florida Republican Rep. Dennis Ross, also calls on the agency to defer to requirements that state legislatures set on the lenders. It has lingered in the House Financial Services Committee despite Wasserman Schultz’s attempts to rally Democrats to get behind the measure.

Wasserman Schultz has said she supports the CFPB and has pushed back against Republican attempts to gut the bureau. But she has defended the bill, which she says would “push the pause button” while other states enact measures like Florida’s. Advocates say Florida’s laws haven’t gone far enough, and the Sunshine State has remained a hub of business for an industry that has faced crackdowns from state legislatures around the country.

“Payday lending is unfortunately a necessary component of how people get access to capital that are the working poor,” she told CBS Miami in April. “I trust that the Consumer Financial Protection Bureau, regardless of whether this bill becomes law, will ultimately do what’s right, and I will support whatever they decide.”

Spokesmen for Wasserman Schultz and Warren did not reply to a request for further comment.

The industry could get relief from the rules should Republican Donald Trump get to the White House. Trump has said he would abolish the 2010 Dodd-Frank law that created the CFPB. Hillary Clinton, who is poised to take the Democratic presidential nomination, has backed the bureau and its approach toward the industry.

The CFPB rules cover not just what an industry group estimates are the more than 16,000 traditional storefront lenders, but online payday loans where much of the recent growth has taken place, auto title loans and other deposit advance offers.

While the CFPB lacks the authority to restrict interest rates charged on the short-term, small-dollar loans, its lending requirements would effectively override state laws that advocates say are too weak.

“Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt,” CFPB Director Richard Cordray said in a statement. “It’s much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey.”

Under the proposals released Thursday, lenders will be required to determine upfront whether a borrower can afford to pay back the full amount of each payment due while still being able to meet living expenses and other financial obligations.

The rules would also prevent lenders from offering a new loan to a borrower for 30 days if he or she had already taken out three in a row. That's meant to cut down on repetitive borrowing just to pay back old loans. And the proposal would prevent lenders from attempting to debit a borrower’s bank account more than twice without further authorization if they are short the cash needed to pay back a loan.

The rules "could dramatically reduce unaffordable, debt-trap loans and encourage the availability of more responsible credit," Mike Calhoun, president of the Center for Responsible Lending, a nonprofit group that has advised the bureau, said before they were released.

While the industry says it wants to get rid of bad players, lobbyists say small-dollar lending will dry up if the bureau moves ahead as aggressively as it has indicated.

"If the CFPB's rules are anything like the concepts outlined last year, they will endanger access to credit for the millions of Americans who responsibly use short-term loans to manage their finances," said Jamie Fulmer, senior vice president of public affairs at Advance America, a large payday lender. "For the regulated businesses that offer these consumers' preferred credit option, particularly smaller lenders, it would amount to a death sentence."

Dennis Shaul, chief executive officer of Community Financial Services Association of America, said in a statement that the rules are a "staggering blow" to those looking for these types of loans.

"What is missing in the bureau’s rule is an answer to the very important question, ‘Where will consumers go for their credit needs in the absence of regulated nonbank lenders?’" Shaul said.

The industry group says uncertainty over the new rules, as well as shifts in business models, have already taken a toll on the lenders.

State legislatures across the country are deeply divided over how the industry should be reined in — if at all — resulting in a tapestry of varying restrictions. According to Pew Charitable Trusts, 27 states still allow storefront payday lenders and loans to be offered with annual interest rates above 391 percent. Another 24 have either banned storefront businesses altogether or put in limits on what they can charge, typically by capping interest and fees. Pew has said that some 12 million Americans borrow from payday lenders each year. In 1 in 5 cases, the borrower is forced to take out seven or more loans to pay the initial amount, the CFPB says.

Meanwhile, consumer advocates have been lobbying the bureau not only to crack down on bad offers but to make room for cheaper alternatives that banks and credit unions can provide instead.

The typical payment owed on these loans takes up about one-third of a borrower's paycheck, according to Pew.

"That's unaffordable and blows up a borrower's budget," said Nick Bourke, who directs Pew's research on consumer issues.