The Consumer Financial Protection Bureau (CFPB) released its much anticipated proposed rule aimed at ending what it calls "payday lending debt cycles." The 1,334-page rule will require small-dollar lenders to undertake comprehensive steps to ensure that the consumer has the ability to repay the short-term or high-cost installment loan. This proposed rule would be the first set of federally promulgated rules aimed at short-term lenders.
According to CFPB Director Richard Cordray, "the Consumer Bureau is proposing strong protections aimed at ending payday debt traps. Too many borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt. It's much like getting into a taxi just to ride across town and finding yourself stuck in a ruinously expensive cross-country journey. By putting in place mainstream, commonsense lending standards, our proposal would prevent lenders from succeeding by setting up borrowers to fail."
The more stringent underwriting requirements under the so-called full-payment test would require lenders to determine up front whether consumers can afford to repay their loans without reborrowing. Under this new test, lenders would have to know the borrower's income and determine whether the borrower could still meet certain personal financial obligations such as purchasing food and paying for utilities. Further, lenders would be required to pull the consumer's credit report to verify the amount of outstanding loans and required payments. An exception to the full-payment test would be loans made under the "principal payoff option," for loans under $500, in which the lender could offer a borrower up to two extensions of the loan, but only if the borrower pays off at least one-third of the principal with each extension.
The rule would also restrict the borrower's ability to roll over payday and auto title loans within 30 days after paying off a previous loan. Lenders could offer a similar short-term loan only if a borrower demonstrated an improved financial state since the prior loan was made. Loans would be capped at three in succession followed by a mandatory 30-day cooling-off period. Similar provisions would also apply to high-cost installment loans.
As for debt collection, lenders would have to give consumers written notice before attempting to debit the borrower's bank account. This three-day notice would inform consumers of the timing, amount and method of debit. Further, lenders' debit attempts would be limited under the rule to restrict certain debt collection fees.
The proposed rule also adds a reporting requirement whereby lenders would use credit reporting systems to report and obtain information about loans made under the full-payment test or the principal payoff option. Adding a layer of potential liability for lenders, these systems would be considered consumer reporting companies, subject to applicable federal laws such as the Fair Credit Reporting Act, and would be required to register with the CFPB.
The proposed rule will cover payday loans, auto title loans, deposit advance products, and certain high-cost installment and open-end loans. Critically, the CFPB is considering other products that could ultimately fall within the purview of a final rule. Comments on the proposal are due by Sept. 14, 2016.
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