At a field hearing in Richmond, Virginia on March 26, the Consumer Financial Protection Bureau (CFPB) outlined the proposal it is considering to regulate payday lending. The proposal would cover short- and long-term payday loans, as well as vehicle title loans, deposit advance products, and certain high-cost installment and open-end loans. The CFPB views these products as “debt traps,” and the proposal would “requir[e] lenders to take steps to make sure consumers can repay their loans.”
In broad strokes, the CFPB’s outline provides for two different approaches to the “elimination” of “debt traps”: prevention and protection. Prevention is based on the lender determining the consumer’s ability to repay, and protection focuses on restricting product terms to ensure that consumers can affordably repay their debt. The CFPB is also considering restrictions on payment collection practices that, in the CFPB’s view, may result in excess fees for consumers.
With respect to short-term loans—i.e., products that require consumers to pay back the loan in full within 45 days—the proposal under consideration would require that the lender determine the consumer’s ability to repay, as described below, or adhere to certain specified loan terms, including a cap on loan amount ($500) and the number of rollovers (generally, two), and a prohibition on requiring that the consumer pledge his or her vehicle as collateral. Regarding the ability-to-repay determination, the lender would need to make a “reasonable determination” whether the consumer will have enough remaining income to repay the loan, fulfill major financial obligations, and meet living expenses without re-borrowing during the term of the loan. In doing so, the lender must consider and verify amount and timing of income, major financial obligations, and the consumer’s borrowing history. Lenders making an ability-to-repay determination would also generally be subject to a cooling-off period of 60 days between loans.
Longer-term loans would be defined as products of more than 45 days where the lender collects payments through access to the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and the all-in APR is more than 36 percent. The proposal under consideration would require that the lender either make an ability-to-repay determination, in a manner similar to the determination described above, or adhere to “debt-trap protection” requirements. The CFPB is considering two “debt-trap protection” alternatives for long-term products: product restrictions similar to the NCUA payday alternative loans program or capping the monthly payment at 5 percent of the consumer’s gross monthly income and requiring repayment within 6 months. Under this second alternative, the lender would not be permitted to make more than two such loans within a 12-month period.
As it relates to payment collection, the CFPB is considering requiring three-day payment reminders and a new authorization with more than two consecutive returns.
As a next step, the CFPB plans to convene a Small Business Review Panel, as is required under the Small Business Regulatory Enforcement Fairness Act of 1996, to gather feedback from small lenders on the proposal under consideration. And the long march toward payday loan regulation continues.