When the Dodd-Frank Wall Street Reform and Consumer Protection Act passed, we knew the day would come when payday lenders could find themselves in the crosshairs of the CFPB; and installment lenders would be collateral damage. March 26, 2015 was that day.
Last week, before the President’s speech in Birmingham, Alabama and the CFPB’s field hearing in Richmond, Virginia, we expected the President and the CFPB to unveil a concerted policy approach on the payday lending industry. Boy, did they ever… last Thursday was a long day.
Shortly after midnight on Thursday morning, the CFPB released its proposal to regulate payday loans, vehicle title loans, and certain installment loans. Specifically, the proposal covers two categories of loans: (1) short-term loans that must be repaid in 45 days, and (2) ‘high-cost’ loans of more than 45 days with an ‘all-in’ APR (including add-on charges) of more than 36% when the lender has access to a consumer’s bank account/paycheck or holds a security interest in a vehicle. Lenders making loans in each category must choose either the “debt trap prevention requirements” or the “debt trap protection requirements.” Each of the requirements includes specific rules, including limitations on loan refinancings or ‘rollovers.’ Additionally, the proposal imposes limitations on a lender’s ability to access a consumer’s deposit account.
At noon on Thursday, the CFPB conducted a field hearing on payday lending in Richmond. At the hearing, CFPB Director Richard Cordray delivered his remarks on the proposal. He explained, “[W]e are taking an important step toward ending the debt traps that are so pervasive in both the short-term and longer-term credit markets. Today we are outlining a proposal that would require lenders to take steps to make sure borrowers can repay their loans.”
Just a few hours after Director Cordray concluded his remarks, President Obama discussed the proposal in a speech at Lawson State Community College in Birmingham. Referencing the initiative, the President noted, “If you’re lending to somebody, knowing they can’t pay you back, and you’re going to put them on the hook and just squeeze them harder and harder and harder and take more and more money out of them, you’re taking advantage of them.” He continued, “[I]f you lend out money, you have to first make sure that the borrower can afford to pay it back. Don’t lend somebody money if you know they can’t pay it back.”
To share several observations from our review of the proposal:
All signs point to this becoming a top priority for both the CFPB and the Obama Administration. For those hoping it will just go away—it won’t. The CFPB’s primary focus is on ability to repay and access to consumers’ bank accounts. Many payday lenders will soon be forced to make substantial changes to underwriting and loan origination. The payday lending industry is about to undergo a significant change. If an installment lender does not access a consumer’s bank account or paycheck or take a security interest in a vehicle, it is not subject to the new proposal… at this point (see the next two observations). This is only an outline of a proposal, so there are still several steps before this becomes ‘law.’ Next, the CFPB will meet with the Small Business Review Panel to discuss the proposal. Because we are only in the initial stages of the rulemaking process, this proposal can, and likely will, change. Installment lenders need to keep a close eye on this in the event that the scope of the rule expands.