This week, the Consumer Financial Protection Bureau (CFPB) proposed a long-awaited rule on payday, vehicle title, and certain high-cost installment loans – collectively. The proposed rule is open for comment through September 14, 2016. Generally speaking, the proposed rule covers two categories of loans. The first category is short-term loans that have a term of 45 days or less. The short-term category includes typical 14-day and 30-day payday loans and 30-day vehicle title loans. The second category is long-term loans that have a term of more than 45 days. The long-term category includes loans with (1) a total cost of credit exceeding 36 percent; and (2) a lien or security interest in the consumer’s vehicle or direct access to a consumer’s account or the ability to garnish wages. It also includes long-term loans with certain balloon payment characteristics.
The proposed rule does not cover the following types of loans: (1) loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan; (2) home mortgages and other loans secured by real property or a dwelling if recorded or perfected; (3) credit cards; (4) student loans; (5) non-recourse pawn loans; and (6) overdraft services and lines of credit.
The proposed rule contains several concepts that previously have been employed in the residential mortgage space. For example, the CFPB has incorporated substantial underwriting standards for covered loans. The underwriting standards are reminiscent of the Ability to Repay (ATR) rules applicable to residential mortgages. Generally speaking, lenders must verify and/or forecast a consumer’s income, debt obligations, housing costs, and basic living expenses for the duration of the covered loan as part of a full-payment underwriting test. Lenders must also take into account the number of covered loans a consumer has outstanding.
The underwriting standards, for all intents and purposes, will prevent consumers from falling into the trap of repeatedly taking out multiple loans in quick succession. That said, the proposed rule does contain certain safe harbor loans, such as loans with relatively low interest rate ceilings and loans containing favorable repayment terms that do not require underwriting. The “qualified mortgage” concept in the residential mortgage space was a similar safe harbor. The proposed rule also contains significant rules on permissible debt collection practices for covered loans as well as newly promulgated disclosures. Obviously, these same concepts played a substantial role in the residential mortgage space in the form of loss mitigation and foreclosure reform and the creation of TILA-RESPA Integrated Disclosure (TRID).
The CFPB’s proposal will have a significant impact on the small-dollar lending industry in the coming months. It is also likely to have a negative impact on those consumers that rely on the availability of the targeted products.