In a long-anticipated move, the Consumer Financial Protection Bureau has proposed a rule that requires lenders that originate payday, auto title, and other installment loans to ensure that consumers have the ability to repay their loans. The proposed rule also eliminates repeated attempts to debit consumers' accounts in a manner that results in additional fees to consumers.
The proposed rule - which was announced in a release topping 1,330 pages - applies to certain short-term and longer-term credit products that the Bureau believes are aimed at financially vulnerable consumers. Under the proposed rule, a covered loan means closed-end or open-end credit (excluding credit cards, purchase money loans, real estate loans, student loans, non-recourse pawn transactions, and certain overdraft lines of credit) that is extended to a consumer primarily for personal, family, or household purposes and:
- For closed-end credit that does not provide for multiple advances to consumers, the consumer is required to repay substantially the entire amount of the loan within 45 days of consummation, or for all other loans, the consumer is required to repay substantially the entire amount of the advance within 45 days of the advance under the loan; or
- For closed-end credit that does not provide for multiple advances to consumers, the consumer is not required to repay substantially the entire amount of the loan within 45 days of consummation, or for all other loans, the consumer is not required to repay substantially the entire amount of the loan within 45 days of an advance under the loan, and the following conditions are satisfied:
- The total cost of credit for the loan exceeds a rate of 36 percent per annum, as measured at the time of consummation or at the time of each subsequent ability-to-repay determination required to be made under the rule; and
- The lender or service provider obtains either a leveraged payment mechanism or vehicle security at the same time as, or within 72 hours after, the consumer receives the entire amount of funds that the consumer is entitled to receive under the loan.
A lender or service provider obtains a leveraged payment mechanism under the proposed rule if it:
- Has the right to initiate a transfer of money, through any means, from a consumer's account to satisfy an obligation on a loan, except that the lender or service provider does not obtain a leveraged payment mechanism by initiating a one-time electronic fund transfer immediately after the consumer authorizes the transfer;
- Has the contractual right to obtain payment directly from the consumer's employer or other source of income; or
- Requires the consumer to repay the loan through a payroll deduction or deduction from another source of income.
A lender or service provider obtains vehicle security if it obtains an interest in a consumer's motor vehicle (as defined under the Dodd-Frank Act) as a condition of the credit, regardless of how the transaction is characterized by state law, including:
- Any security interest in the motor vehicle, motor vehicle title, or motor vehicle registration whether or not the security interest is perfected or recorded; or
- A pawn transaction in which the consumer's motor vehicle is the pledged good and the consumer retains use of the motor vehicle during the period of the pawn agreement.
The proposed ability-to-repay guidance includes a "full-payment" test that would require lenders to determine upfront that consumers can afford to repay their loans without reborrowing. The proposal includes a "principal payoff option" for certain short-term loans and two less risky longer-term lending options so that borrowers who may not meet the full-payment test can access credit without become embroiled in additional debt. Lenders would be required to use credit reporting systems to report and obtain information on certain loans covered by the proposal. The proposal would also limit repeated debit attempts that can rack up bank overdraft fees and may make it harder for consumers to get out of debt.
Specifically, the proposal includes the following protections:
- Full-payment test: Under the proposed full-payment test, lenders must determine whether the borrower can afford the full amount of each payment when it is due and still meet basic living expenses and major financial obligations. For short-term loans and installment loans with a balloon payment, full payment means affording the total loan amount and all the fees and finance charges during the term of the loan, plus meeting major financial obligations as they come due and covering basic living expenses, without having to reborrow within the next thirty days. The proposal also limits the number of short-term loans that can be made in quick succession.
- Principal payoff option for certain short-term loans: Under the proposal, consumers could borrow a short-term loan up to $500 without the full-payment test as part of the principal payoff option that is structured to keep consumers from being trapped in debt. Lenders could not offer this option to consumers who have outstanding short-term or balloon-payment loans or have been in debt on short-term loans more than 90 days or more than 6 loans in a rolling 12-month period. Lenders are also prohibited from obtaining an auto title as collateral. As part of the principal payoff option, a lender could offer a borrower up to two extensions of the loan, but only if the borrower pays off at least one-third of the principal with each extension.
- Less risky longer-term lending options: The proposal would permit lenders to offer two longer-term loan options with more flexible underwriting, but only if they pose less risk by adhering to certain restrictions. The first option would be to offer loans that generally meet the parameters of the National Credit Union Administration "payday alternative loans" program where interest rates are capped at 28 percent and the application fee is no more than $20. The other option is to offer loans that are payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36 percent or less, not including a reasonable origination fee, so long as the lender's projected default rate on these loans is 5 percent or less. The lender must refund the origination fees any year that the default rate exceeds 5 percent. Lenders would be limited as to how many of either type of loan they could make per consumer per year.
- Debit attempt cutoff: Under the proposal, lenders must give consumers written notice before attempting to debit the consumer's account (leveraged payment mechanism) to collect payment for any loan covered by the proposed rule. After two straight unsuccessful attempts, the lender is barred from debiting the account again unless the lender gets a new and specific authorization from the borrower.
The Bureau seeks written comments on the proposed rule once it is published in the Federal Register. Comments on the proposal are due by September 14, 2016. The Bureau proposes that the final rule will become effective 15 months after publication of the final rule in the Federal Register. The Bureau also proposes that certain provisions necessary to implement the consumer reporting components of the proposal become effective 60 days after publication of the final rule in the Federal Register.