On June 2, 2016, the Consumer Financial Protection Bureau (“CFPB”) released a statement regarding proposed new rules aimed at the payday lending industry. The proposed rules seek to protect consumers from what the CFPB refers to as “payday debt traps” and may impose stricter requirements on such payday lenders. The CFPB is soliciting comments on the proposed payday lending rules, which must be received by the CFPB no later than September 14, 2016.
What are the Proposed New Payday Lending Rules?
CFPB Proposes New Payday Lending Rules
The CFPB has proposed a “full-payment test.” Under the test, lenders would be required to make an up-front determination as to a consumer’s ability to repay a loan prior to providing that loan. Before offering such loans, payday lenders would be required to verify that consumers can afford to pay the full amount of each payment owed when due, whether as a lump sum or on an installment plan basis. Among other things, payday lenders would be required to determine whether consumers have enough income to repay loans, meet other “major financial obligations,” and still be able to pay “basic living expenses.”
However, if a particular consumer seeks a short-term loan of “up to $500,” the payday lender may forgo the full-payment test, provided that the consumer agrees to pay the loan in a single payment (with up to 2 extensions where the principal is paid down at each step). This option will not be available to consumers who have outstanding short-term or balloon-payment loans or have been in debt on short-term loans more than 90 days in a rolling 12-month period. Additionally, payday lenders would be barred from taking automobile title as collateral for such loans.
The proposed new rules will also make it more difficult for payday lenders to make additional loans to existing customers. For example, if a consumer attempts to roll-over an existing payday loan, or seeks an additional payday loan within 30 days after paying off a prior loan, the payday lender will be forbidden to extend the additional loan. However, in cases where the payday lender can verify that a particular consumer’s financial situation during the term of the new loan “would be materially improved relative to what it was since the prior loan was made,” then an additional loan can be granted.
The proposed new rules also require that payday lenders give consumers written notice at least 3 days prior to attempting to debit each such consumer’s bank account to collect payment. Moreover, if the payday lender makes 2 unsuccessful attempts to debit a consumer’s bank account for repayment, such payday lender would be prohibited from any further attempts unless the lender receives a new and specific authorization from the consumer to again debit the account.
The practice of payday lending has been under intense scrutiny in recent years. Google has even banned AdWords advertisements from appearing on websites offering payday loans. In this environment, it is important that payday lenders consult with competent counsel to keep abreast of industry and regulatory developments.