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The Vault
July 10, 2020
CFPB Kills Payday Mandatory Underwriting
Earlier this week, the CFPB announced a final rule covering small dollar lending which rescinds the mandatory underwriting provisions of the 2017 Payday Lending Rule. The 2017 Payday Lending Rule was the result of a prior CFPB initiative, which was led by former CFPB Director Richard Cordray, and which appears to have been developed following the CFPB’s publication of a white paper on April 24, 2013. The white paper summarized the findings of the CFPB’s analysis of payday loans and deposit advance products. In the white paper, the CFPB concluded that “these products may become harmful for consumers when they are used to make up for chronic cash flow shortages. We find that a sizable share of payday loan and deposit advance users conduct transactions on a long-term basis, suggesting that they are unable to fully repay the loan and pay other expenses without taking out a new loan shortly thereafter.” To remediate this, the CFPB issued a Notice of Proposed Rulemaking in June 2016 and then the Final Payday Lending Rule on October 5, 2017, which had two primary parts.
- For short-term and longer-term loans with balloon payments, the Bureau stated it would be an unfair and abusive practice for a lender to make such loans without reasonably determining that consumers have the ability to repay the loans according to their terms. Therefore, the 2017 Payday Lending Rule generally required that, before making such a loan, a lender must reasonably determine that the consumer has the ability to repay the loan creating mandatory underwriting provisions.
- For the same set of loans and for longer-term loans with an annual percentage rate greater than 36 percent that are repaid directly from the consumer’s account, the 2017 Payday Lending Rule stated it would be an unfair and abusive practice to attempt to withdraw payment from a consumer’s account after two consecutive payment attempts have failed, unless the lender obtains the consumer’s new and specific authorization to make further withdrawals from the account.
This week’s rule amends 12 C.F.R. § 1041 by removing the mandatory underwriting provisions as well as the related definitions, reporting, and recordkeeping requirements. This repeal is very timely, as the planned implementation of these portions of the 2017 Payday Lending Rule was delayed until November of this year. It should be noted that although the new amendments effectively kill several key limits on payday lenders, the CFPB has opted to retain the automatic payment protections. The complete redline of 12 C.F.R. § 1041 can be found here.
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