On October 5, 2017, the CFPB finalized its proposed rule impacting payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments. The final rule is intended to stop payday debt traps by generally requiring lenders to conduct ability-to-repay determinations before making such loans and adhere to additional related requirements, and these protections are in addition to any existing requirements under state or tribal law. As a result of this final CFPB rule, the OCC rescinded (effective October 5, 2017) its 2013 guidance on deposit advance products, indicating that the guidance is no longer necessary due to the coverage of the CFPB’s rule.
The CFPB intended to address certain harms it identified in the loan products subject to the rule, including repeat short-term borrowing for payday loans, instances of default in the loan products, seizure of automobiles as a result of inability to repay auto title loans, penalty fees resulting from lender attempts to debit payments from a consumer’s checking account, and potential bank account closure such as when there is a negative balance on the account for an extended period of time.
The final CFPB rule generally applies to lenders who regularly extend credit to consumers primarily for personal, family, or household purposes, when they make loans covered by the rule. Covered loans include the following types of open-end or closed-end loans: (1) short-term loans with terms that are 45 days or less, which includes loans that the consumer must repay substantially the entire amount: (a) of the loan within 45 days of consummation for closed-end loans; and (b) of the advance within 45 days of the advance for open-end loans; and (2) longer-term balloon-payment loans, when the consumer must repay substantially the entire balance or amount of single advance more than 45 days after consummation in either a single payment or through at least one payment that is more than twice as large as any other payment. Certain rule provisions apply to a third type of loan, covered longer-term loans (cost of credit exceeds 36% APR and leveraged payment mechanism where the lender can initiate transfers from the consumer’s account on its own).
However, the final CFPB rule does not apply to loans such as: (1) loans extended solely to finance the purchase of a consumer good in which the good secures the loan; (2) home mortgages and other loans secured by real property or a dwelling if recorded or perfected within the term of the loan; (3) credit cards; (4) student loans; (5) non-recourse pawn loans; (6) overdraft services and lines of credit; (7) wage advance programs; (8) certain no-cost advances; (9) certain alternative loans that generally conform to the NCUA’s requirements for the Payday Alternative Loan (PAL) program; and (10) accommodation loans (which are loans that, among other things, involve a lender and its affiliates collectively making 2500 or fewer covered loans in the current year and in the preceding year, and deriving no more than 10% of their receipts from covered loans).
The final CFPB rule considers it an unfair and abusive practice to make or increase the credit available under covered short-term and longer-term balloon payment loans before the lender has reasonably determined that the consumer has the ability-to-repay the loan according to its terms, which involves determining that the consumer can make loan payments while also meeting major financial obligations and basic living expenses during the loan and for 30 days after the highest payment on the loan. This means that a lender generally first must: (1) obtain a written statement from the consumer of their net income and payment amounts required to meet their major financial obligations (i.e., housing expense, minimum debt obligation payments, and child support and alimony obligations); (2) verify their net monthly income as well as payment obligations (using a national consumer report, registered information system report, and lender or affiliates’ records); (3) determine ability-to-repay using projections of their residual income or debt-to-income (DTI) ratio during the calendar month with the highest payment(s) under the loan; and (4) ensure that the loan will not result in the consumer having more than 3 covered loans taken out within 30 days of each other.
Additional key provisions in the final CFPB rule include the following:
- Potential exclusion from the above ability-to-repay requirements for using a principal step-down option for covered short-term loans generally if:
- (1) the loan is not open-end credit;
- (2) the first loan’s principal amount is no more than $500, the second and third loans made within 30 days of a prior loan reduce that amount by at least 1/3 from the prior loan (i.e., the principal amount of the second loan is no greater than 2/3 of that of the first and the principal amount of the third loan is no greater than 1/3 of that of the first), and there is a 30-day cooling off period after 3 covered short-term loans under this option;
- (3) the lender and any service provider do not take security interest in the consumer’s vehicle; and
- (4) the consumer has not had an outstanding covered loan in the past 30 days.
- The rule provides model forms for disclosures required under this option.
- Written notice and authorization requirements in connection with lender attempts to withdraw payments from a consumer’s transaction account when prior attempts have not been successful as a result of the consumer’s insufficient funds in the account, as well as payment transfer requirements and conditions in connection with attempts to collect late fees or returned item fees.
- Provisions governing registered information systems.
- Requirements for policies and procedures addressing the rule.
- Requirements to retain evidence of compliance with the rule for 36 months.
While the final CFPB rule does not apply these ability-to-repay requirements on all longer-term loans addressed in the proposed rule, the CFPB indicated that it is conducting further study to determine how to best address concerns about existing and potential practices regarding that market of products.
Except for provisions regarding registered information systems (effective 60 days after publication), the final CFPB rule generally is effective 21 months after publication in the Federal Register. The rule is available here. CFPB guidance regarding implementation of the rule is available here.
As a related matter, on the same day that the CFPB issued this final rule, the OCC announced its immediate rescission of its guidance regarding deposit advance products (OCC Bulletin 2013-40, Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products). In his announcement, Acting Comptroller Keith A. Noreika acknowledged that continuation of this guidance “would subject national banks and federal savings associations to potentially inconsistent regulatory direction and undue burden as they prepare to implement the requirements of the CFPB’s final rule,” but held the door open to potential new OCC guidance on these matters in the future. The OCC continues to encourage its banks to responsibly offer responsible products to meet its consumers’ needs for short-term, small-dollar credit, considering the core lending principles in existing OCC guidance (e.g., safety and soundness, fair customer treatment, compliance with applicable laws, effective risk management, reasonable underwriting), and reminded banks that it will continue to monitor compliance and take appropriate action with regard to these products. The OCC announcement is available here.