On June 1, 2016, the Consumer Financial Protection Bureau released a proposed rule that would restrict the ability for payday lenders to originate loans. The proposal includes both loans with a term of 45 days or less and loans with a term greater than 45 days that have an annual percentage rate greater than 36 percent and either are repaid from the consumer’s account or income or are secured by the consumer’s vehicle (payday loans, vehicle title loans and certain high-cost installment loans) (together, “Payday Loans”). Excluded from the list of Payday Loans are credit cards; student loans; non-recourse pawn loans; overdraft services and lines of credit; loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan; and home mortgages and other loans secured by real property or a dwelling if recorded or perfected.
Short Term Payday Loans
The proposed rule would require payday lenders to enhance their screening process prior to approving a short term Payday Loan. Generally, the payday lender would be required to reasonably determine that the customer will be able to meet basic living needs and verify ability to meet financial obligations as they become due. The payday lender would be required to:
- verify the consumer’s net income;
- verify the consumer’s debt obligations using a national consumer report and a consumer report from a “registered information system” as described below;
- verify the consumer’s housing costs or use a reliable method of estimating a consumer’s housing expense based on the housing expenses of similarly situated consumers;
- forecast a reasonable amount of basic living expenses for the consumer—expenditures (other than debt obligations and housing costs) necessary for a consumer to maintain the consumer’s health, welfare, and ability to produce income;
- project the consumer’s net income, debt obligations, and housing costs for a period of time based on the term of the loan; and
- determine the consumer’s ability to repay the loan based on the lender’s projections of the consumer’s income, debt obligations, and housing costs and forecast of basic living expenses for the consumer.
In addition, if a consumer approaches the payday lender for a short term Payday Loan within 30 days of a short term or long term (with balloon payments) Payday Loan, the payday lender would be required to presume a consumer is unable to pay the short term Payday Loan unless the payday lender can sufficiently document betterment in the consumer’s financial circumstances. Payday lenders would be prohibited from making a Payday Loan to a consumer that has undertaken three short term Payday Loans within a 30-day span.
Under certain conditions, a payday lender would be permitted to make short term Payday Loans without making any determination. With specific disclosures, a payday lender could make a principal loan less than $500, a second loan up to two-thirds the amount, and a third loan up to one-third the amount within a 30-day span; however, no more than six short term Payday Loans and no more than 90 days of a consumer experiencing debt would be permitted within a 12-month period.
Long Term Payday Loans
Similar to short term Payday Loans, the proposed rule would require an enhanced screening process for long term Payday Loans to reasonably determine that the customer will be able to meet basic living needs and verify consumer ability to meet financial obligations as they become due prior to approval. The proposed rule for long term Payday Loans would require all of the same determinations discussed in the previous section regarding short term Payday Loans. However, in addition, payday lenders would be required to reasonably account for volatility in the consumer’s basic living expenses, income, and financial obligations. Similar to short term Payday Loans, payday lenders would be required to assume a consumer is unable to repay a Payday Loan when the consumer that has already undertaken a Payday Loan within a 30-day span, or has expressed struggle to pay other debts of the payday lender or an affiliate. The payday lender can overcome the assumption with documented proof the consumer’s financial position has improved.
Without engaging in screening for consumer capability to repay the loan, a lender would be able to make a long term Payday Loan under a conditional exemption modeled on the National Credit Union Administration’s (NCUA) Payday Alternative Loan (PAL) program. Under the exemption, a payday lender would be required to have a principal greater than $200 and less than $1,000, fully amortizing payments, with a term of over 46 days but less than six months, among other conditions. Such loans would be required to have an application fee of over $20 and have an interest rate permitted for Federal credit unions under the PAL regulations.
In addition, a payday lender can deviate from the screening of consumers’ capability to repay the loan if a long term Payday Loan satisfies certain structural conditions. The exemption would require the long term Payday Loan to have a term more than 46 days but less than 24 months and fully amortizing payments, an annual default rate less than 5 percent, a modified total cost of credit of less than or equal to an annual rate of 36 percent, and a origination fee less than $50 or reasonably proportionate to the underwriting costs, among other conditions. If in any year the lender exceeds an annual default rate of 5 percent, the lender would be required to refund all origination fees paid by all consumers.
The proposed rule would restrict payday lenders’ collection practices. Payday lenders would be required to give at least three business days’ notice prior to each Payday Loan collection attempt from a consumer’s checking, savings, or prepaid account. The notice would contain material information surrounding the upcoming payment attempt, and electronic notices would be acceptable with the consent of the consumer. In addition, payday lenders would be prohibited from withdrawing payments from consumer accounts in the event of two consecutive failed withdrawal attempts due to a lack of sufficient funds. The payday lender would be required to notify the consumer of such event and follow procedures to receive consumer authorization to enable the payday lender to make subsequent withdrawals from the account. Such prohibition would apply to both failed attempts that are initiated through a single payment channel or different channels (e.g., automated clearinghouse system and the check network).
The proposed rule would require at origination payday lenders to furnish to registered information systems basic information for most Payday Loans, update the information over the life of the loan, and furnish information at the conclusion of the Payday Loan. Prior to originating a Payday Loan, a payday lender would be required to obtain the consumer report from the registered information system and review the report for material information.
The rule would require payday lenders to increase their documentation and recordkeeping. A lender would have to establish written policies and procedures that ensure compliance with the proposal, and follow such policies and procedures. The payday lender would be required to retain all documentation, including the loan agreement and electronic records in tabular format exhibiting origination calculations and determinations for consumers that qualify for exceptions to or overcome a presumption of unaffordability.
Comment Period and Effective Date
Comments to the proposed rule are accepted on or before September 14, 2016. The rule is projected to become effective 15 months after publication in the Federal Register.