The Consumer Financial Protection Bureau (the “CFPB”) is charged with promoting fairness and transparency and preventing unfair, deceptive, or abusive acts and practices in the consumer financial markets. The CFBP derives its rulemaking authority under Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) and began operation in 2011.
The brief history of the CFPB coincides with the recent explosive growth of peer-topeer lending platforms. While the CFPB does not explicitly regulate peer-to-peer lending at the present time, lending platforms are keenly focused on the future role of the CFPB in regulating peer-to-peer lending. Understanding the goals and studying the methods of the CFPB as it seeks to eliminate certain predatory lending practices will provide useful guidance to consumer lending platforms and the emerging marketplace lending industry as a whole. Insights gained in this process will enable platforms to distance themselves from those lending practices most criticized by the CFPB – offering expensive (often serial) loans to borrowers experiencing severe financial difficulty, while using a preferred repayment position to ensure profitability even if the consumer borrower fails.
On March 26, 2015, the CFPB announced that it is considering a framework of rules and regulations for “payday” and similar loans, and released a lengthy proposal (the “CFPB Payday Lending Proposal,” or the “Proposal”) designed to protect the most vulnerable consumer borrowers from debt traps – multiple re-borrowings, successive finance charges and escalating high-interest debt obligations – by imposing obligations on lenders to evaluate the impact of the loan on the borrower and make a detailed “ability to repay” determination prior to extending credit.1 Procedurally, the Proposal will next be reviewed by small financial services providers through a Small Business Review Panel under the Small Business Regulatory Enforcement Fairness Act. The Small Business Review Panel will in turn meet with a small group of representatives from small businesses and not-for-profits likely to be subject to any rules that are implemented.
The CFPB Payday Lending Proposal seeks to regulate two broad categories of consumer loans: (i) “covered short-term loans” with a contractual maturity of 45 days or less, and (ii) “covered longer-term loans” with an “all-in” annual percentage rate in excess of 36% which provides the lender with either direct access to repayment through the borrower’s account or paycheck, or a non-purchase money security interest in the borrower’s vehicle as collateral for the loan. Lenders originating covered short-term loans and covered long-term loans would be obligated to determine a borrowers’ ability to repay based on income, major financial obligations and borrowing history. Covered loans may also be subject to cooling-off periods unless the lenders can verify that the borrowers’ circumstances have changed.
The fact-intensive, presumably manual screening of individual consumer borrowers required under the Proposal for covered loans could be difficult to achieve in the automated, algorithmic world of peer-to-peer and marketplace lending. Accordingly, loans originated by lending platforms may elect to stay well outside the purview of covered short-term loans and covered longterm loans under any CFPB payday lending regulations that are eventually adopted. While the vast majority of peer-to-peer and marketplace lending platforms do not originate payday loans in the classic sense, all platforms lending to consumer borrowers should closely follow the progress of the CFPB Payday Lending Proposal and the evolving technical definitions of covered short-term loans and covered long-term loans under the Proposal in order to ensure that the platform’s loans do not inadvertently fall within the scope of the loans proposed to be regulated by the CFPB.
The loans covered by the Proposal are summarized below:
Covered short-term loans: The Proposal defines “covered short-term loans” as consumer loans with contractual maturities of 45 days or less. Peer-to-peer lending platforms could address this prong by requiring that their loans have maturity longer than 45 days.
Covered longer-term loans: Under the Proposal, consumer loans with contractual maturities greater than 45 days will be covered longer-term loans if:
- the loan has an “all-in” annual percentage rate greater than 36%; and
- the lender achieves a “preferred repayment position” by obtaining either:
- the ability to access the borrower’s account or paycheck for loan repayment (including by automated clearing house (“ACH” ) transfer; or
- a non-purchase money security interest in the borrower’s car.
Of vital importance to all platforms is the CFPB’s view that access to a borrower’s bank account is sufficient to establish a platform’s “preferred repayment position” and therefore satisfies a component of the “covered long-term loan” definition. Since virtually all peer-topeer lending platforms originating consumer loans include ACH authorization as a fundamental and necessary method of collecting payments from a consumer’s bank account to repay a loan, these platforms will generally satisfy this part of the “covered long-term loans” definition.
The remaining question for peer-to-peer platforms, then, is how to ensure that the “all-in” annual percentage rate of loans originated by the platform do not exceed the maximum rate specified under the Proposal. Currently platforms lending to consumer borrowers calculate the annual percentage rates of their loans under the Truth in Lending Act. The Proposal, however, indicates the CFPB is considering an “all-in” APR analogous to the military annual percentage rate (the “MAPR”), which includes charges that are not included in the finance charge or the annual percentage rate calculated under the Truth in Lending Act.2 For example, the cost of certain credit insurance premiums is not included in the APR calculation currently used by platforms, but would be included in a MAPR-like definition if adopted by the CFPB. In the future, to ensure that it is not originating a covered longer-term loan, a lending platform will need to translate (and reprogram) the Truth in Lending APR to the CFPB’s new “all-in” APR for covered loans once the final regulations define the new APR calculation precisely.
The CFPB Payday Lending Proposal provides peer-topeer lending platforms with an early look at both the type of harm to consumer borrowers the CFPB is working to prevent, and the scope of the regulatory mechanisms that the CFPB may use in adjacent consumer credit markets. The Proposal presents an outstanding opportunity for marketplace lenders to proactively align their platforms with the CFPB’s broad initiatives and distinguish all consumer loans originated by the platform from the loans (of any duration) covered in the Proposal.
In light of the CFPB’s obvious interest in rapidly evolving forms of consumer finance, all lending platforms should continue to monitor the progress of the CFPB Payday Lending Proposal.