The Consumer Financial Protection Bureau (CFPB) announced last week that it is considering a proposal aimed at payday lending, which will require lenders to take certain steps intended to increase consumers’ ability to affordably repay their debts. The proposal, as outlined by the CFPB, sets forth an either-or framework wherein lenders can chose between two sets of requirements designed to eliminate “debt traps.” The first set seeks to prevent certain lending at the outset and the second provides consumer protections throughout the lending process.
The crux of the prevention framework is a requirement that lenders conduct an ability-to-repay analysis at the outset of the lending process to underwrite each loan for affordability. The proposal allows lenders, however, to extend certain loans without making the ability-to-repay determination so long as they satisfy the alternative “protection” requirements. The CFPB’s proposal would apply to payday loans, vehicle title loans, deposit advance products, and certain installment and open-end loans. Although short-term loans—those that require repayment within 45 days—and longer-term loans would be treated separately under the proposed outline, the proposal gives lenders of both types of loans the choice between the prevention regulations or the protection regulations.
In setting forth the alternatives, the CFPB explained that it proposed the either-or protection requirements in an attempt to aid certain lenders, especially small lenders, who may have difficulty implementing the prevention requirements. The CFPB also opined that the alternative approaches may reduce the cost of compliance for lenders.
What the CFPB did not outline, however, is how the either-or approach will work operationally. Perhaps the regulations will read like the “Chose Your Own Adventure” chapter books popular during my tween years, wherein the lender will chose one approach with no room for looking back and that approach will shape the remainder of its regulatory experience. Alternatively, perhaps the regulations will allow lenders to choose on a loan-by-loan basis which set of regulations will apply to any given transaction. While the CFPB may address these questions during the rulemaking process, lenders are left wondering just how the either-or approach will play out.