In advance of issuing it’s rulemaking on pay day loans and other short term loans, the CFPB has issued its scathing Report on Single-Payment Vehicle Title Lending. Last year, the CFPB issued its pay day proposal to end “debt traps”. In that proposal, the CFPB proposed eliminating or significantly curtailing short term credit products which were secured by liens on the consumer’s vehicle. Today’s Report is likely to be used in support of the forthcoming rulemaking. Vehicle title loans are allowed in about half of the United States and allow consumers to secure a short term single payment loan using their vehicle’s title as collateral. The vehicle must be owed free and clear and the loan is generally based upon the value of the vehicle.
The Report is based upon the CFPB’s examination of nearly 3.5 million loans made in ten states between 2010 and 2013 (the height of the economic crisis). In the Report, the CFPB makes the following key findings:
- The average loan was $959 and carried an APR of 317%;
- Of the loans studied, 87% were reborrowed within 60 days;
- The loans have a high rate of default. A majority of the loans are reborrowed and of those, roughly 20% default and end up as repossessions;
- More than half of the loans become long term debt. In other words, over half roll over the loan four times or more; and
- As a result of the high percentage of rollover, loan sizes increase exponentially due to additional fees and interest.
The CFPB is considering a proposal which sets forth two alternative path for lenders to take when dealing with short term credit products: prevention and protection. Short term credit products are defined as being those credit products that would require the consumer to pay back the loan in full within 45 days. Lenders will have the ability to choose one of two business models:
The “prevention” alternative focuses on the consumer’s ability to repay the loan. This alternative requires the lender to make a good faith determination at the outset of the loan as to whether the consumer has an ability to repay the loan when due, including all associated fees and interest, without reborrowing or defaulting. For each loan, the lender would be required to verify the consumer’s income, major monthly financial obligations and borrowing history (with the lender, its affiliates and possibly other lenders). A lender would generally have to comply with a 60-day cooling off period between loans. A second or third loan could only be made within the 60-day cooling off period where the lender could document a change in the borrower’s financial condition. In any event, after three covered short term loans, a mandatory 60-day cooling off period would have to elapse before the lender could make a covered short term loan to the consumer.
The “protection” alternative focuses on the repayment options and limiting the number of short terms loans a buyer could take out in any twelve month period. Under this alternative, a lender would not be required to determine the consumer’s ability to repay. Instead, the loan could not: (a) exceed $500; (b) be secured by the consumer’s vehicle; (c) carry more than one finance charge; (d) rollover more than twice; and (e) any rollover would have to taper off. The CFPB is contemplating two “tapering” alternatives. Under the first, the amount of principal on each rollover would taper in such a manner as to prevent an unaffordable balloon payment when the third payment is due. Under the second, the lender would be required to provide a no-cost extension to the consumer if the consumer was not able to pay off the loan in full at the end of the third loan.
In its Fall Rulemaking Agenda, the CFPB indicated that its rules on short term loan products were in the proposed rulemaking stage. Many in the industry expect the rules to be published shortly.