On June 2, the Consumer Financial Protection Bureau (CFPB) proposed a rule aimed at “payday lending” that will apply to virtually all lenders, with request for comments by Sept. 14.
Here is a summary of the basic provisions of the proposed rule. However, with comments, the proposal is more than 1,300 pages in length, and the proposed rule and examples are more than 200 pages long. It is necessary to review the details of the proposed rule to understand its potential impact on your products and processes fully. You may wish to review your current and future offerings with your institution’s counsel and compliance officer to determine the potential impact if major provisions of this proposed rule are finalized by the CFPB.
The proposal generally would cover two categories of loans.
- First, the proposal generally would cover loans with a term of 45 days or less.
- Second, the proposal generally would cover loans with a term greater than 45 days, provided that they have an all-in annual percentage rate greater than 36 percent and either are repaid directly from the consumer’s account or income or are secured by the consumer’s vehicle.
Ability to repay
For both categories of covered loans, the proposal would identify it as an abusive and unfair practice for a lender to make a covered loan without reasonably determining that the consumer has the ability to repay the loan. Or if the lender does not determine if the consumer can make payments due, as well as meet major financial obligations and basic living expenses during and for 30 days after repayment. Lenders would be required to verify the amount of income that a consumer receives, after taxes, from employment, government benefits or other sources. In addition, lenders would be required to check a consumer’s credit report to verify the amount of outstanding loans and required payments.
The proposed rule would provide lenders with options to make covered loans without satisfying the ability-to-repay and payment notice requirements, if those loans meet certain conditions.
- The first option would be offering loans that generally meet the parameters of the National Credit Union Administration “payday alternative loans” program, where interest rates are capped at 28 percent and the application fee is no more than $20.
- The other option would be offering loans that are payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36 percent or less, not including a reasonable origination fee, so long as the lender’s projected default rate on these loans is 5 percent or less. The lender would have to refund the origination fees any year that the default rate exceeds 5 percent. Lenders would be limited as to how many of either type of loan they could make per consumer per year.
The proposal also would impose certain restrictions on making covered loans when a consumer has — or recently had — certain outstanding loans. These provisions are extensive and differ between short- and long-term loans. For example:
- Payday and single-payment auto title: If a borrower seeks to roll over a loan or returns within 30 days after paying off a previous short-term debt, the lender would be restricted from offering a similar loan. Lenders could only offer a similar short-term loan if a borrower demonstrated that their financial situation during the term of the new loan would be materially improved relative to what it was since the prior loan was made. The same test would apply if the consumer sought a third loan.
- Even if a borrower’s finances improved enough for a lender to justify making a second and third loan, loans would be capped at three in succession followed by a mandatory 30-day cooling-off period.
- High-cost installment loans: For consumers struggling to make payments under either a payday installment or auto title installment loan, lenders could not refinance the loan into a loan with similar payments. This is unless a borrower demonstrated that their financial situation during the term of the new loan would be materially improved relative to what it was during the prior 30 days. The lender could offer to refinance if that would result in substantially smaller payments or would substantially lower the total cost of the consumer’s credit.
Furthermore, it would be defined as an unfair and abusive practice to attempt to withdraw payment from a consumer’s account for a covered loan after two consecutive payment attempts have failed, unless the lender obtains the consumer’s new and specific authorization to make further withdrawals from the account. The proposal would require lenders to provide certain notices to the consumer before attempting to withdraw payment for a covered loan from the consumer’s account unless exempt under one of the “safe harbor” options.
Registered information systems
Finally, the proposed rule would require lenders to use credit reporting systems to report and obtain information about loans made under the full-payment test or the principal payoff option. These systems would be considered consumer reporting companies, subject to applicable federal laws and registered with the CFPB. Lenders would be required to report basic loan information and updates to that information.
The proposed regulation may be found here.