On October 5, 2017 the Consumer Financial Protection Bureau (CFPB) revealed its final rule regulating payday lending. For the past five years, the CFPB had been doing research and seeking comments from the industry on how to address its concerns with what it calls “lending traps” associated with small-dollar lending. It has finalized a Rule, 12 CFR Part 1041, which, most significantly, will require lenders to determine a borrower’s ability to repay various types of small-dollar loans, including covered payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments. Covered “payday loans” are those that have a repayment term of less than 45 days and require borrowers to either (a) post-date a check for their full balance, including fees, or (b) allow lenders to directly debit the borrower’s account for the full balance of the loan. Covered “auto title loans” whose terms are 30 days or less using a vehicle as collateral, and covered “balloon payment loans” are loans that allow borrowers to make a series of small payments before the entire balance comes due.
The Rule’s Coverage
The new Rule, which the CFPB first proposed in June and received more than one million comments, is set to become effective in 21 months from the date it is published in the Federal Register. The most significant change, as mentioned above, is the requirement that lenders determine whether borrowers can afford their payday loans before issuing them using a “full payment test.” A full payment test means that the borrower can afford the loan (principal balance plus all fees and charges in the allotted time) and his existing financial obligations. However, lenders can avoid this requirement by offering an option which allows borrowers to pay debt more gradually under a principal payoff option. In addition, the Rule specifically exempts less risky options offered by community banks or credit unions, such as those that are authorized by the National Credit Union Administration, and certain no-cost advances or advances offered by employers.
Additionally, the Rule has components that cover payday loans and loans “with terms of more than 45 days that have (1) a cost of credit that exceeds 36 percent per annum; and (2) a form of ‘leveraged payment mechanism’ that gives the lender a right to withdraw payments from the consumer’s account.” These components prohibit lenders from making more than two unsuccessful attempts to debit a borrower’s account without additional borrower authorization. They also require lenders to give consumers written notice before the first attempt to debit the consumer’s account to collect payment for any loan covered by the Rule.
Finally, if lenders avoid the full payment test using the principal payoff option, they still face some regulations. There are still restrictions on multiple loans—under this option, lenders may offer up to two extensions, but only if the borrower pays off at least one-third of the original principal each time, and do not have more than six outstanding short-term or balloon-payment loans over a rolling 12-month period. And the principal-payoff option is not available for loans for which the lender takes an auto title as collateral.
Industry Reaction
This new Rule has sharp critics in the payday lending circles, but has also created some opportunities for more traditional lenders, as shown by industry groups. For instance, the Online Lenders Alliance, which represents payday lenders, has been openly critical of the rule, accusing it of “crushing innovation” and promising to fight the Rule. And in what some outlets are calling a kind of rebuke to the Rule, Acting Comptroller of the Currency Keith Noreika has rescinded Obama-era guidance which provided requirements for national banks that offer deposit advance products. In comparison, the American Bankers Association has issued support for the Rule’s deference to community banks, and sees an opportunity for these institutions to move into the smaller dollar lending space.
The Rule’s Future
The Rule’s future is unclear, particularly because so much could change within the CFPB in the twenty-one months before the Rule becomes effective. By the time the Rule is set to become effective the current CFPB Director, Richard Cordray, will have been replaced by a new director, appointed by a Republican, who may be less aggressive in his or her regulatory goals and could reverse course on this Rule. In addition, and more immediately, the current Republican Congress can use the Congressional Review Act to nullify the Rule. Rep. Blaine Luetkemeyer of Missouri, has stated an intention to have Congress vote on the new Rule. See Luetkemeyer Statement on October 5, 2017. (“I will work with my colleagues on the House Financial Services Committee to hold the CFPB accountable and reverse this final rule that harms consumers across the country”). Accordingly, Lenderlaw watch will monitor the roll-out of this Rule, and will report on any changes as they develop.