In May 2014, the Department of Justice (DOJ) and the FDIC were criticized by the U.S. House of Representatives’ Committee on Oversight and Government Reform in May 2014 Report for using the DOJ’s “Operation Choke Point” to force banks out of providing services to payday lenders and other “lawful and legitimate merchants”. The Committee’s report noted, among other things, that the DOJ was inappropriately demanding, without legal authority, that “bankers act as the moral arbiters and policemen of the commercial world”.
Now the CFPB has announced that it is considering rules that would end “payday debt traps”. At least the CFPB is following standard regulatory processes in doing so rather than trying to regulate payday lenders by punishing their bankers. The CFPB’s announcement, published March 26, 2015 (available here), outlines its proposals in preparation for convening a Small Business Review Panel to gather feedback from small lenders, which the CFPB refers to as “the next step in the rulemaking process”.
The CFPB’s proposal considers payday loans, deposit advance products, vehicle title loans, and certain other loans, and includes separate proposals for loans with maturities of 45 days or less, and for longer-term loans. Broadly speaking, the CFPB is considering two different approaches – prevention and protection – that lenders could choose from.
The prevention requirements for short-term loans of 45 days or less could require the following:
- A requirement for lenders to verify the consumer’s income, major financial obligations, and borrowing history to determine whether there is enough money left over to repay the loan.
- Lenders would have to adhere to a 60-day cooling off period between loans.
- The consumer could not have any other similar loans outstanding with any lender.
- Before a lender could make a second or third loan in a two-month period, the lender would need to be able to document that the borrower’s financial condition had improved enough to repay the new loan without re-borrowing.
- After three loans in a row, the lender would be prohibited from making a new short-term loan to the borrower for 60 days.
The protection requirements would be similar to the prevention requirements in certain respects, but would include additional focus on loan terms:
- The loan could not exceed $500, last longer than 45 days, have more than one finance charge, or require the consumer’s vehicle as collateral.
- As under the prevention method, the consumer could not have any similar loans outstanding with another lender.
- Rollovers would be capped at two, for three loans total, followed by a 60-day cooling off period.
- The second and third loans would be allowed only if the lender offers an “affordable way out of debt”. Here the CFPB again has two proposals. One would require that the principal decrease over the three-loan sequence, to that it is all repaid when the third loan is due; the second would require the lender to provide a no-cost “off-ramp” if the borrower is unable to repay the third loan, allowing the consumer to pay off the loan without further fees.
- The consumer could not be more than 90 days in debt on such short-term loans in a 12 month period.
The CFPB’s proposal also considers a prevention/protection approach for longer-term loans. As with the short-term loan proposals, the prevention approach would require an ability to repay determination, and the protection approach would include substantive limitations on loan terms.
Finally, the CFPB also is considering a requirement for borrower notification before each debit to the consumer’s bank account for loan payments, and a prohibition on making more than two consecutive attempts to debit a consumer’s account for payment if those attempts were unsuccessful due to insufficient funds or other reasons.
The details of the CFPB’s proposal run approximately 53 pages. It is clear that some of the proposals, including, but not limited to, the ability to repay requirements, will increase costs to lenders and therefore to consumers. If you are a payday lender, you might want to read the proposal carefully and reach out to your small loan associations to ensure that the CFPB hears your views.