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In an effort to further restrict the proliferation of high-interest, short-term loans, federal regulators have proposed new rules governing banks that want to offer payday loans.

The proposed rules – written by the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. – are common sense: they require banks to review a borrower’s ability to repay a loan based on other financial obligations. Currently, only six banks (including behemoths Wells Fargo and U.S. Bank) nationwide are believed to offer advanced deposits, which are similar to payday loans.

The banks would have to assess a borrower’s cash inflow and outflow, and be required to reevaluate a borrower every six months. Borrowers that become delinquent would be ineligible for deposit advances.

In addition, banks would only be allowed to offer borrowers one loan at a time, and would be barred from providing a single borrower more than one loan per month. In 2010, Washington state enacted similar restrictions, limiting borrowers to eight loans per year. This has reduced the volume of payday loans substantially; in 2009, 3 million loans were given to Washington borrowers. A year later, the number dropped to 1 million.

While the proposed regulations have only just been introduced, the goal of the new federal regulations is to reduce “churning,” when borrowers take out new payday loans to pay for those they’ve already taken out. “Churning” can lead to a vicious cycle of debt and fees that is difficult for borrowers to escape. Some say the new regulation may effectively stop short-term, high-interest lending by traditional banks that are regulated by the Federal Reserve and FDIC. The Consumer Financial Protection Bureau is also expected to release new restrictions on traditional payday lenders as well as banks in the future.

Changes to restrictions on payday loans, which apply to payday lenders such as Moneytree (as opposed to the federal regulations that apply only to banks), are also under consideration in Washington state. The House and Senate have drafted two different proposals to change a consumer-friendly 2009 law that limited the size of loans given out to a maximum of $700, capped interest rates around 35%, and set a maximum number of loans per year at eight. Now, Rep. Larry Springer’s (D-Kirkland) has introduced a bill that would increase the maximum loan amount to $1,000, and allow higher interest rates. The Senate proposal increases the maximum to $1,500, and caps effective interest rates to 200 percent. Both bills would eliminate the current “payday lending” scheme, replacing it with “high-interest installment loans.”

Consumer advocates say that these bills will have the same problems as payday loans pre-2009, trapping consumers in a cycle of debt with sky high interest rates. Although technically eliminating payday lending, the high interest loans that replace them would essentially act as a surrogate to payday lending.

Ensuring consumers of all income brackets have access to quick credit is important, but it should be at a modest and manageable interest rate. The U.S. Congress recognized the problem of predatory payday loans in 2006, when they a law that capped payday loan interest rates for military families at 36%. But these new proposals to repeal current protections for borrowers begs the questions: are policymakers acting in the best interest of the constituents by allowing interest rates in excess of 100%?

The Tacoma News Tribune reports that payday loan king Moneytree and its executives contributed nearly $200,000 to state lawmakers’ campaigns in 2012, including to those who are primary and co-sponsors of the bills.

By EOI Intern Bill Dow