October 5, 2017
On October 5, 2017 the Consumer Financial Protection Bureau (“CFPB”) finalized its Rules relating to short-term consumer loans. https://www.consumerfinance.gov/policy-compliance/rulemaking/final-rules/payday-vehicle-title-and-certain-high-cost-installment-loans/. The Rule will become effective 21 months after it is released in the Federal Register.
As noted in a report by the Wall Street Journal, the scope of the Rule was significantly reduced from the initial notice of proposed rulemaking issued on June 2, 2016. As predicted, the significant restrictions contained in the Rule are targeted only to loans of 45 days or less (although the CFPB notes that it is still finalizing rule making for certain high-cost installment loans) and balloon payment loans. The Rule focuses on two primary restrictions and a new disclosure obligation:
Ability to Repay: The biggest change for small-loan lenders will be the implementation of ATR obligations that now requires lenders to confirm a consumers: (i) income, (ii) existing debt obligations, (iii) housing costs, (iv) living expenses, and (v) residual income or debt-to-income ratios. This verification must include the use of third party sources to confirm information provided by the consumer.
Prohibition on Refinancing: A lender may not make a short-term loan to a consumer that has already taken out three short-term loans (or balloon payment loans) within 30 days of each other, for 30 days after the third loan is outstanding. I.e., a consumer must wait a period of 30 days before obtaining a new loan.
Notices Regarding Payment Processing: A lender must provide at least 6 days’ notice (by mail) or 3 days’ notice (electronically or in person) prior to initiating the first payment transfer using an electronic payment method or a check. Model forms have been issued for the payment notices. If an “unusual payment” because of timing or amount will be processed, the lender must provide at least 10 days’ notice (by mail) or seven days’ notice (electronically) or three days’ notice (in person).
Exemptions: Importantly, the following categories of loans are exempt from the Rule:
The Rule will significantly affect the payday and short-term title loan industry, dramatically changing the burden on lenders (and consumers) seeking access to short-term sources of financing. Many have speculated that Congress may attempt to overrule the Rulemaking under the Congressional Review Act (“CRA”). Only time will tell whether this will dramatically shift the nature of small-dollar, short-term lending. Many expect that this will push lenders out of traditional, fee-based, non-recourse payday lending into long-term vehicle secured or asset secured lending. The CFPB’s comments sprinkled throughout the Rule regarding their intent to ultimately take on this space may be the “fair warning” that an immediate transition from payday may take lenders out of the current Rule and into a similar regime once the CFPB has time to finalize additional rulemaking. The significant reduction in the coverage of the Rule may play into attempts by industry groups to challenge the rulemaking process since the initial CFPB research identified much broader “concerns” in multiple product categories, while the Rule only focuses on a subset of the lenders identified as causing consumer harm.
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