On March 26, 2015, CFPB Director Richard Cordray announced a proposed outline of changes to payday lending that would vastly alter the current rules and regulations. The new rules would address both short-term and longer-term credit products such as payday loans; deposit advance products; high-cost installment loans; certain other open-end lines of credit and other loans. Director Cordray stated that the purpose of the new regulations would be to return to a lending culture based on the consumer’s ability to repay as opposed to the lender’s ability to collect. And, while the CFPB has characterized its proposals as “ending debt traps,” only time will tell if the new proposals make lending impossible for at-risk populations who rely on such alternative forms of lending just to get by. “[S]mall businesses all other affected stakeholders, including consumers and providers alike” have the option to comment on the proposals outlined by the CFPB.
In its proposal, the CFPB outlined two approaches — so called “debt trap prevention” and “debt trap protection.” Lenders would have the ability to choose which framework to implement and to which to be held accountable. In addition, the CFPB detailed various other proposals to regulate how, how often, and when lenders access consumer financial accounts. We discuss each in turn below.
Short-Term Loans (45 days or less)
Short-term loans are those made by lenders who require a consumer to pay back the loan within 45 days or less. Most of the credit-products available offer these kinds of loans, and they are typically timed for repayment with consumer paycheck cycles.
Option One: Debt Trap Prevention
Option One would require lenders to do a mini-underwrite of any consumer seeking a short-term loan. In essence, the lender would have to ensure that the consumer has the financial capability to pay back the loan itself, interest, and any fees at the time it is due without defaulting or taking out additional loans. In particular, lenders would have to check a consumer’s income, other financial obligations, and borrowing history and ensure that enough money remains to pay back the loan. In addition, the lender would have to verify that the consumer did not already have another loan with another lender.
Lenders would also have to require a 60-day cooling off period in between loans as a general rule. To be eligible for an exception to the 60 day cooling off period, lenders would have to verify that the consumer’s financial circumstances have changed such that the consumer would have enough capital to repay the new loan without needing to seek an additional loan. Without such verification, the 60 day cooling off period would remain in effect. No consumer would be permitted to take out an additional loan after taking out three loans in a row for a period of 60 days no matter what. In his remarks, Director Cordray proposed requiring lenders to implement a no-interest/no-fee installment agreement with the consumer if he or she was unable to pay back the loan after two or three rollovers of the initial debt, or a decreased loan amount of up to three additional loans, until the consumer had paid back the debt in full.
Option Two: Debt Trap Protection
Option Two would not require lenders to do a mini-underwrite, but would limit them in the type of repayment options, the number of loans a consumer could take out, and restrict the amount of the loan itself. Similar to Option One, the consumer could not have any loans with other lenders, and would be capped at two rollovers of the initial loan. There would also be a 60 day cooling off period after the second rollover. Under Option Two, lenders would be limited to loaning consumers a maximum of $500, could not last longer than 45 days, and could only contain one finance charge. In addition, consumers could not put up their cars as collateral for the loan.
If the consumer needed a second and third consecutive loan, then the lender would be required to ensure that the consumer had “an affordable way out of debt,” as described in Option One. Finally, the lender would not be permitted to allow the consumer to be more than 90 days in debt within a 12 month period.
Longer-Term Loans (45 days or more)
Longer-term loans are typically accompanied by consumers providing lenders with access to their deposit accounts or paychecks, or giving them a security interest in their cars or other vehicles. The “all-in annual percentage rate is more than 36 percent.” The CFPB is considering use of the current Military Lending Act’s requirement that the 36 percent include interest, fees, and add-on product charges” as well.
Option One: Debt Trap Prevention
Like with short-term loans, lenders would have to do a mini-underwrite of a consumer to ensure that he or she can make each installment payment (including all interest, fees, and add-on product charges) when it is due without defaulting or taking out additional loans. And, each time a consumer seeks additional money, the lender would have do complete the mini-underwrite anew. In addition, should the consumer go delinquent on a longer-term loan, the lender would be prohibited from refinancing the loan under similar terms unless the consumer could demonstrate changed financial circumstances that would show that he or she could repay the new loan.
Option Two: Debt Trap Protection
Option Two under longer-term loans would subject lenders to the same requirements as the National Credit Union Administration’s program for “payday alternative loans.” Some of the requirements that the NCUA is subject to are that the loan principal is between $200 and $1000, and it goes down each month. The interest rate would have a maximum rate of 28 percent, and the application fee could not be more than $20. As with all other options, the consumer could not have any other loans with other payday lenders. Finally, a consumer could only obtain two longer-term loans every six months, and only one at a time. In addition to the restrictions above, lenders would also have to ensure that the installment amount is no more than five percent of the consumer’s gross monthly income. If any of the requirements listed above are not met, a longer-term loan would be unavailable to a consumer.
Consumer Protection Proposed Rules
Finally, the CFPB proposed additional restrictions on all lenders providing both short and longer-term loans who obtain access to a consumer’s checking, savings, or prepaid account (either in the form of a card, post-dated check, etc.) to obtain payments for loans made to consumers. They are as follows:
First, lenders would be required to notify a borrower three business days before accessing money held in the consumer’s deposit account, and would provide important information regarding the upcoming withdrawal. Second, lenders would only be able to make two consecutive attempts to collect money from consumers’ accounts. If both attempts were unsuccessful, the lender would have to obtain new authorization to withdraw funds.
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While all of these new proposed rules and regulations may provide consumers with additional safeguards from themselves, payday lenders should take the time that the CFPB has provided them to give the CFPB substantial comments on how these new regulations would affect their businesses, and whether they would be able to continue to stay in business and provide consumers with the kind of access to capital that they have in the past. In addition, lenders should advise the CFPB whether any of the new regulations are not feasible.