On October 5, 2017, the Consumer Financial Protection Bureau (CFPB) finalized its new rules governing the small-dollar consumer loan market, based on a proposal first released in June 2016. The rule requires underwriting for “ability to repay,” puts new limits on sequential loans, and restricts repeated debits of a borrower’s bank account for collection purposes, among other provisions. The new substantive restrictions on loans take effect 21 months from publication (in July 2019), which is longer than the 15-month implementation period in the proposed rule.
Ability to Repay
The ability-to-repay standard is the centerpiece of the new rule and generally requires lenders to make an underwriting determination that the borrower can pay the loan payments and still meet basic living expenses and major financial obligations, both during the loan and for 30 days after the final (or largest) payment. The final rules, like the proposed rules, generally require lenders to document that a prospective loan meets the ability-to-repay standard by verifying the borrower’s income and major financial obligations and estimating basic living expenses for the month in which the highest sum of payments is due. On these requirements, the final rule represents a simplification over the approach taken in the proposed rule, which included a complex system of presumptions of “unaffordability” and requirements for rebutting those presumptions.
Additionally, the Bureau introduced some flexibility into the income and expense verification requirements that were not part of the earlier proposal. Specifically, the final rules allow lenders to: (1) rely on a borrower’s written statement of income or housing expense in certain circumstances when documentation is unavailable; (2) re-use a national consumer credit report for 90 days in most circumstances rather than obtaining a new one for each loan; and (3) consider income from other household members on which the applicant may reasonably rely.
Although the rules generally require lenders to underwrite to an ability-to-repay standard, there are some limited exceptions. First, the final rules retain an exemption to the ability-to-repay standard for loans of $500 or less that include a mandatory step-down repayment structure and are not title-secured or open-end loans. Importantly, these “principal payoff option” loans are available only to applicants who meet strict eligibility requirements based on their recent borrowing history.
Second, the Bureau has taken a bifurcated approach on longer-term loans, applying the ability-to-repay standard to loans with balloon payments but not to loans with level payments, regardless of interest rate. This is a change from the proposed rule, which would have required ability-to-repay underwriting for all longer-term loans that carried an interest rate of more than 36% per year or that required the borrower to provide a check or electronic payment authorization as security. The new rules do, however, apply the restrictions on electronic collection attempts (outlined below) to all covered loans, including those non-balloon longer-term loans excluded from the ability-to-repay requirement.
Reflecting the Bureau’s view that extended loan sequences are a source of consumer harm, the new rules prohibit more than three back-to-back loans in a row. After the third short-term loan (or longer-term balloon-payment loan) in a sequence, lenders must observe a 30-day cooling off period.
As a means of administering the mandatory cooling-off periods and intensity-of-use restrictions imposed by the new rules, the Bureau is requiring lenders to use credit reporting systems registered by the Bureau to report and obtain information about covered loan originations. Lenders will be required to consult, and report to, these information systems when originating and servicing covered loans.
The new rules also include what the Bureau refers to as “penalty-fee prevention measures,” which limit repeated debit attempts for collection purposes and require notifying borrowers of the amount, timing, and method of upcoming debit attempts. These provisions apply broadly to short-term loans, balloon-payment loans, and any loan with an annual percentage rate over 36% that provides for lender access to the borrower’s bank account through any collection channel. The new rules require lenders to provide advance written notice before making the first debit attempt on a loan and any time a debit will vary in amount, timing, or channel from previous debits. Perhaps most significant for the small-dollar industry is the provision capping unsuccessful debit attempts at two (regardless of payment channel used), after which the lender is prohibited from debiting the account again without a new and specific authorization from the borrower.
The rule facially applies to all lenders making covered short-term or longer-term loans, regardless of whether they operate online or out of storefronts and regardless of licensure status. However, given the proven difficulty of reaching online-only and foreign-based lenders, initial examination and enforcement activity may be focused primarily on brick-and-mortar lenders located in the United States. The future implementation and enforcement of the rule continue to raise uncertainties, as the rule could face both CFPB leadership changes and potential legal challenges before the effective date in 2019.