As expected, the CFPB issued its proposed payday loan rule, in a release running 1,334 pages. The CFPB also issued a fact sheet summarizing the proposal. On June 15, 2016, from 12 p.m. to 1 p.m. ET, we will hold a webinar on the proposal: The CFPB’s Proposed Payday/Auto Title/High-Rate Installment Loan Rule: Can Industry Adapt to the New World Order? Information about the webinar and a link to register are available here.
Like the proposals under consideration that the CFPB outlined last year in preparation for convening a SBREFA panel, the proposed rule is broad in terms of the products it covers and the limitations it imposes. Lenders covered by the rule include nonbank entities as well as banks and credit unions. In addition to payday loans, the rule covers auto title loans, deposit advance products, and certain high-rate installment and open-end loans.
The proposed rule establishes limitations for a “covered loan” which can be either (1) any short-term consumer loan with a term of 45 days or less; or (2) a longer-term loan with a term of more than 45 days where (i) the total cost of credit exceeds an annual rate of 36%, and (ii) the lender obtains either a lien or other security interest in the consumer’s vehicle or a form of “leveraged payment mechanism” giving the lender a right to initiate transfers from the consumer’s account or obtain payment through a payroll deduction or other direct access to the consumer’s paycheck. The rule excludes from coverage purchase-money credit secured solely by the car or other consumer goods purchased, real property or dwelling-secured credit if the lien is recorded or perfected, credit cards, student loans, non-recourse pawn loans, overdraft services and overdraft lines of credit, and apparently credit sale contracts.
The proposed rule is very restrictive for covered short-term credit, requiring a lender to choose between:
- Making a reasonable determination of the consumer’s ability to repay, which would require the lender to take account of the consumer’s basic living expenses and obtain and verify the consumer’s income and major financial obligations. Some additional liberality is provided, however, insofar as lenders are permitted to verify housing expenses by records of expense payments, a lease or a “reliable method of estimating” housing expenses in the borrower’s locality. The rule includes certain presumptions, such as a presumption that a consumer cannot afford a new loan when the consumer is seeking a covered short-term loan within 30 days of repayment of a prior covered short-term loan or a covered balloon payment longer-term loan. To overcome the presumption, a lender would have to document sufficient improvement in the consumer’s financial capacity. A lender would be prohibited from making a covered short-term loan to a consumer who has already taken out three covered short-term loans within 30 days of each other.
- Making up to three sequential loans in which the first loan has a principal amount up to $500, the second loan has a principal amount that is at least one-third smaller than the principal amount of the first loan, and the third loan has a principal amount that is at least two-thirds smaller than the principal amount of the first loan. A lender could not use this option if it would result in the consumer having more than six covered short-term loans during a consecutive 12-month period or being in debt for more than 90 days on covered short-term loans during a consecutive 12-month period. A lender using this option cannot take vehicle security.
For covered longer-term credit, the rule requires a lender to choose between:
- Making a reasonable determination of the consumer’s ability to repay, with the requirements for making such a determination similar to those that apply to short-term loans.
- Using one of two options (both of which limit the number of loans a lender can make to a consumer under the option in a 180-day period and, in any event, seem of limited utility at best to “traditional” high-rate lenders):
- An option modeled on the National Credit Union Administration’s program for payday alternative loans. Requirements include a principal amount of not less than $200 and not more than $1,000, repayment in two or more fully amortizing, substantially equal payments due no less frequently than monthly and in substantially equal intervals, a term of at least 46 days and not more than six months, an annualized interest rate of not more than 28%, and an application fee of not more than $20, reflecting the actual cost of processing the application.
- An option under which the total cost of credit does not exceed an annual rate of 36% (excluding a single origination fee of up to $50 or one that is a “reasonable proportion” of the lender’s underwriting costs), the loan term is at least 46 days and not more than 24 months, the loan is repayable in two or more payments that are fully amortizing, substantially equal, and due no less frequently than monthly and in substantially equal intervals, and the lender’s projected default rate on all loans made using this option does not exceed 5%. If the default rate in any year exceeds 5%, the lender would be required to refund all origination fees paid by all borrowers whose loans were included in the default rate calculation.
For all covered short-term and longer-term credit, the rule would make a lender subject to the following collection restrictions:
- A lender would generally have to give the consumer at least three business days advance notice before attempting to collect payment by accessing a consumer’s checking, savings, or prepaid account. The notice would have to include information such as the date of the payment request, payment channel, payment amount (broken down by principal, interest and fees), and additional information would be required for “unusual attempts” such as when the payment would be for a different amount than the regular payment or initiated on a date other than the date of a regularly scheduled payment.
- If two consecutive attempts to collect money from a consumer’s account made through any channel are returned for insufficient funds, the lender could not make any further attempts to collect from the account unless the consumer provided a new authorization.
The rule also contemplates the CFPB’s registration of consumer reporting agencies as “registered information systems” to whom lenders would be required to furnish information about certain covered loans and from whom lenders would be required to obtain consumer reports for use in making ability to repay determinations.
Comments on the proposal are due by September 14, 2016 and the CFPB will undoubtedly require considerable time to address the comments it receives. The CFPB has proposed that, in general, a final rule would become effective 15 months after publication in the Federal Register.