The Consumer Financial Protection Bureau is expected to unveil its formal proposal to restrict payday lending on June 2, the first national regulations of short-term, small-dollar loans.

The bureau said Wednesday that it plans to hold a public hearing in Kansas City, Mo., to discuss small-dollar lending. The hearing will be held at the Kansas City Convention Center and will feature remarks from CFPB Director Richard Cordray, as well as testimony from consumer groups, industry representatives and the public. The CFPB typically uses such hearings to unveil key regulations and it's widely expected the agency will roll out the official payday lending plan at this event.

The industry has been anticipating a proposal on the $38.5 billion payday lending industry that could potentially cover a larger swath of financial institutions and fintech companies.

If the CFPB sticks to an outline of its proposal released a year ago, it would significantly restrict payday lending activities and specifically target ways in which borrowers fall into cycles of debt and reborrowing.

The CFPB has said it is intends to give lenders two options for payday loans: either verify the borrower's ability to repay a loan, or comply with restrictions on how often a short-term loan can be rolled over or reissued within a certain time frame. Lenders also could opt for alternatives that allow for less underwriting and documentation.

There is concern that if the agency goes too far in restricting short-term, small-dollar loans there will be a huge backlash from payday lenders and on Capitol Hill, from Republicans and Democrats alike. But if the agency fails to stop the most abusive practices, consumer groups will view the first national standards on payday loans as a failure. A chief concern is what will replace payday lenders if federal regulations force many to shut down.

Mike Calhoun, president of the Center for Responsible Lending, said it is important for the CFPB to devise rules on determining whether a loan is affordable and the borrower has enough income to meet basic needs.

"Without meaningful upfront underwriting and strong protections against loan flipping, lenders can trap borrowers in high-cost debt for years on end," Calhoun said in a statement.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.