It seems that every consumer financial services lawyer in the USA is focused on the CFPB's “Payday, Vehicle Title, and Certain High-Cost Installment Loans” Final Rule. And, well they should be. After all, the CFPB has only been working on this Proposal for 4 years. And, with just short of 1700 pages, there is a lot to study. In all fairness to the Bureau, the Regulation itself is only 66 pages. The Official Interpretation is 120 pages. The rest of the 1500 pages is “summary” explanation.
There have been several rushed summaries for installment lenders. Here is ours:
Our review convinces us that the comments of traditional installment lenders--many submitted by trade associations on your behalf--were actually read and heard by the Bureau, and have been accommodated. That is, with a few exceptions, traditional installment loans are not going to be affected by this new Regulation. The Regulation is scheduled to take final effect in June, 2019.
The new Regulation, 12 CFR Part 1041, primarily concerns three types of consumer loans that are “covered loans”:
- Covered short-term loan-- a term of 45 days or less
- Covered longer-term balloon-payment loan -- length of term exceeding 45 days with any balloon payment feature
- Covered longer-term loan -- a loan with an APR exceeding 36% together with a leveraged payment mechanism (ACH) unless requested or initiated by the consumer.
So, if your consumer loan offerings, do not fall within the categories above, the Regulation basically will not impact your business.
Note that there are several types of loans that are excluded from the Regulation's application including: purchase-money loans (purchase money financing of goods), real estate secured credit, credit cards, student loans, non-recourse (true) pawn loans, overdraft services and lines of credit, wage advance programs, no-cost advances; and ”Alternative loans,” and “Accommodation loans” as such are defined in the Regulation.
In summary, the application of the Regulation to closed-end consumer lending includes:
- loans of 45 days or less without respect to APR
- loans requiring a balloon payment without respect to length of term, APR, or collateral
- loans exceeding 36% APR and utilizing a leveraged payment mechanism (ACH) unless requested or initiated by the consumer
As with every federal law or regulation, the “devil is in the detail”— meaning that definitions are very important, and all of the terms used above have specific meanings. We will continue to analyze the Regulation. Meanwhile, traditional installment lenders can breathe a sigh of relief.
Other types of consumer lenders such as payday, title pawn and specialty lenders making use of balloon payments, should be carefully reviewing the definitions and details as the full regulatory requirements addressing--underwriting, payments, information reporting and record keeping—will have a major impact on the way they are doing business.