The CFPB has proposed a new rule that would curb payday lending by requiring lenders to verify a borrower’s ability to afford their loan and restricting certain lending and collection practices (the “Proposed Rule” or the “Rule”). The breadth of the Proposed Rule is broad, both with respect to the products and entities it covers. In addition to payday loans, the Rule would cover vehicle title loans, deposit advance products, and certain high-rate installment and open-end loans. All lenders, including banks, nonbanks, and credit unions, would be subject to the Rule. The Rule will likely have a profound impact on the payday and small-loan lending industry.
Comments on the Proposed Rule are due by September 14, 2016. The CFPB has proposed that the final rule will become effective 15 months after publication in the Federal Register.
The CFPB’s Proposed Rule would apply to two types of “covered loans”: (1) short-term consumer loans with a term of 45 days or less; and (2) longer-term loans with terms of more than 45 days that have (i) a total cost of credit that exceeds 36%, including all add-on charges, and (ii) the lender obtains access to a “leverage payment mechanism” for payment, such as the customer’s bank account, or a lien or other security interest on a consumer’s vehicle.
The Rule would exclude from coverage the following types of loans: (1) loans extended solely to finance the purchase of a vehicle or other 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; (3) credit cards; (4) student loans; (5) non-recourse pawn loans; and (6) overdraft services and lines of credit.
With respect to covered short-term loans, the Rule would require lenders to make a reasonable determination prior to extending credit that the consumer will have the ability-to-repay the loan and verify the consumer’s income and that the consumer would be able to meet other major financial obligations and basic living expenses. The Rule also establishes certain assumptions for determining the consumer’s ability to repay, such as the presumption that a consumer is not able to afford a new loan if the consumer seeks a covered short-term loan within 30 days of a covered short-term loan or a covered longer-term loan with a balloon payment. In this scenario, a lender would only be able to overcome the presumption if it can document a sufficient improvement in the consumer’s financial capacity. In addition, a lender would be prohibited from extending a covered short-term loan to a consumer that has already taken out three consecutive covered short-term loans within 30 days of each other.
Under the Proposed Rule, a lender would be permitted to make up to three covered short-term loans in short succession without making an ability-to-repay determination, so long as the first loan has maximum amount of $500, the second loan has a principal amount at least one-third smaller than the first loan, and the third loan has a principal amount at least two-thirds smaller than the first loan. A lender could not utilize this lending option if it would cause the consumer to receive more than six covered short-term loans during a consecutive 12-month period or be in debt for over 90 days during a 12-month period.
With respect to covered longer-term loans, the Rule would require a lender to make a reasonable determination of the consumer’s ability-to-repay subject to requirements that are similar to those for covered short-term loans. The Proposed Rule would also require a lender to generally presume that a consumer is not able to afford a new loan if the consumer seeks a covered longer-term loan within 30 days of a covered short-term loan or a covered longer-term loan with a balloon payment. The Rule would also create a general assumption that a loan is unaffordable if the consumer has shown or expressed difficulty in repaying other outstanding covered or non-covered loans made by the same lender or its affiliates. In this situation, a lender would only be able to overcome the presumption if it could document a sufficient improvement in the consumer’s financial capacity.
Under the Proposed Rule, a lender would only be able to make a covered-longer term loan without having to make an ability-to-repay determination using two options. The first option permits a lender to make a covered longer-term loan without an ability-to-repay analysis if the loan has a principal amount of not less $200 and not more than $1,000, fully amortizing payments, and a duration between 46 days and six months. To satisfy the exemption, such loans could not have an interest rate that exceeds the interest rate that is permitted for Federal credit unions under the Payday Alternative Loan regulations and an application fee greater than $20.
The second option would allow a lender to make a covered longer-term loan without an ability-to-repay determination if the loan has fully amortizing payments and a duration between 46 days and 24 months. Such loans must carry a modified total cost of credit less than or equal to an annual rate of 36% (excluding a single origination fee that is not greater than $50 or that is “reasonably proportionate” to the lender’s costs of underwriting), and the lender’s projected default rate for all loans made using this option do not exceed 5%. In the event the default rate in any year is greater than 5%, the lender would have to refund all the origination fees paid by all borrowers whose loans were made using this option.
With respect to automatic payment practices for covered loans, the Rule would deem it an abusive and unfair practice for a lender to continue to attempt to collect from a consumer’s account after two consecutive attempts to collect payments have failed due to insufficient funds. After that, the Rule requires that lenders provide notice to the consumer and obtain new authorization.
In addition, the Proposed Rule would require lenders to provide consumers with three business days advance notice before each attempt to withdraw payment for a covered loan from a consumer’s checking, savings, or prepaid account. The notice would need to include certain key information about the upcoming payment collection, such as the payment amount, and any “unusual attempts” (e.g., withdrawal attempts initiated on a different day or in a different amount than a regular payment).
The Proposed Rule would also require lenders to provide certain information regarding covered loans to registered information systems at origination, over the life of the loan, and when the loan ceases to be outstanding. The CFPB intends the registered information systems to provide a reasonably comprehensive record of a consumer’s recent and ongoing borrowing for most covered loans that lenders would generally be required to review prior to making a covered loan.
The Proposed Rule is available here: http://files.consumerfinance.gov/f/documents/Rulemaking_Payday_Vehicle_Title_Certain_High-Cost_Installment_Loans.pdf.