The CFPB has released proposals for a future payday loan rulemaking that will have a far-reaching impact on the $46 billion payday loan industry and on other markets. Under its proposals, the CFPB is offering industry participants a choice of options for compliance that could demonstrate an intent to frame future deliberations in a manner that is both advantageous to consumers yet fair to industry participants. The proposed rulemaking is likely to occur under the CFPB’s unfairness or abusiveness authority and may also shed further light on the ways the CFPB will expand its use of that authority for payday lenders and other financial services companies.
It is critical for affected businesses to examine the proposals, released on March 26, as soon as possible so as to reasonably assess whether to submit public comment or otherwise seek to impact the CFPB’s decision-making before the proposed restrictions become final.
1. What do the proposed rules cover?
They cover short-term credit products with contracts for 45 days or less and longer-term credit products with an annual percentage rate greater than 36 percent where the lender obtains a preferred payment position by (a) access to repayment through a consumer’s account or paycheck or (b) a non-purchase money security interest in the consumer’s vehicle. In more colloquial terms, such loans would include single-payment payday loans with a single lump-sum payment due within a few weeks or a month, deposit advance products (to the extent they are still available on the market), vehicle title loans, lines of credit, regularly amortizing installment loans and loans with balloon payments. They do not cover student loans, credit cards, real estate loans or bona fide non-recourse pawn loans.
2. What is the legal authority for the CFPB to engage in such rulemaking?
The Dodd-Frank Act. Section 1031 authorizes the CFPB to issue rules to identify and prevent unfair, deceptive or abusive practices or acts in the consumer financial markets. In our view, based on the nature of this market and the CFPB’s priorities to date, the future rulemaking will likely occur under the CFPB’s unfairness or abusiveness authorities. In addition, Section 1032 of the Dodd-Frank Act also authorizes the CFPB to prescribe rules to ensure that the features of financial products or services are effectively disclosed to consumers.
3. Is this the CFPB’s first foray ever into payday lending issues?
Yes and no. Although this is the first time that the CFPB has released a proposal for substantive limitations on payday loans that will come down the pike through its rulemaking authority, the CFPB has been pursuing the payday lending industry through its enforcement authority since CFPB’s date of independence in July 2011.
Here are some observations on the CFPB’s enforcement regime in the payday lending or short-term credit industry:
- Last July 2014, the CFPB took enforcement action against one of the largest payday lenders in the United States, as a result of a CFPB supervisory examination. A negotiated settlement achieved through administrative proceedings included an order for the lender to pay refunds and penalties for collecting payday loan debts in a manner that the CFPB deemed unfair, deceptive and abusive.
- In November 2013, the CFPB took enforcement action against a payday lender for alleged robo-signing practices related to its debt-collection lawsuits.
- In December 2013, the CFPB sued a servicer affiliate of a small-dollar lender affiliated with a Native American tribe on the basis that any attempt to collect a debt that is void for exceeding state usury caps was itself an unfair, deceptive, and abusive act.
- Overall, the payday loan-related enforcement agenda to date demonstrates the tenacity and creativity with which the CFPB examines participants in the payday or small-dollar loan industry.
Moreover, while the Federal Trade Commission has had the power under its Section 5 authority to prohibit unfair and deceptive practices for decades, the notion of an “abusive” act or practice did not exist pre-Great Recession. This is a significant expansion from the federal regulators’ pre-existing legal framework for consumer protection and in reaction to the perceived abuses of the consumer financial services market during the financial crisis. It is notable that two out of the very few cases asserted by the CFPB thus far to define the meaning of an “abusive” practice arose in the payday or short-term loan industry.
Against this backdrop, the ability to repay rules and collections-based rules (described below) that are included in today’s proposals are not surprising. This is especially true given the emphases of the CFPB’s early enforcement cases.
4. What are the limitations in the proposed rules?
For short-term credit products, the proposal is to permit lenders to choose from one of two sets of requirements. Option 1: lenders would need to verify a consumer’s income, major financial obligations, and borrowing history when underwriting the loan to assess the consumer’s ability to repay without re-borrowing or defaulting. This determination must be made in good-faith and require lenders to decide if the consumer has sufficient income remaining after paying major living expenses to satisfy the loan obligation. Under the proposal, a “presumption of inability to repay” will apply in situations where a consumer seeks to re-borrow, or take out an additional loan to repay a prior outstanding covered loan, within 60 days. This presumption is rebuttable if certain criteria are met. Option 2: lenders are allowed to circumvent the ability-to-repay requirements if they use alternative screening requirements and offer certain structural protections (including for example a no-cost off-ramp) to consumers. Additional requirements include capping off rollover loans to two (so there are three loans total) and a mandatory 60-day cooling off period between loans.
For longer-term loans with account access or non-purchase money security interests in vehicles, the proposal also involves lender choice. Option 1: As in the case of short-term loans, under this proposal, lenders would be required to make reasonable, good-faith determinations that the consumer has the ability to repay without re-borrowing or defaulting. The “presumption of inability to repay” will apply to refinancing transactions or longer-term loans with a balloon payment, for example. These presumptions are rebuttable if certain criteria are met. Option 2: Lenders would be allowed to circumvent the ability-to-repay determination procedures if (a) the loan satisfies the National Credit Union Administration’s Payday Alternative Loan program requirements and some additional criteria, or (b) the loan has payments below a certain ratio and satisfies other conditions.
For collections practices (for both short-term or longer-term credit products), the proposed rules include (a) requiring lenders to give consumers three business-days advance notice before submitting a transaction to a bank, credit union or prepaid account for payment and (b) after two unsuccessful, consecutive attempts have been made to collect payment from a consumer’s account, prohibiting lenders from making any further attempts to collect from the account unless a new authorization is executed by the consumer.
5. What is the CFPB’s rationale for commencing payday loan rulemaking?
As noted in the Introduction to today’s proposals, the CFPB “is concerned that too often in these markets lenders can create the conditions to succeed even where the consumer fails, upending notions of traditional lending based on mutual risk and aligned incentives.” It goes on to explain the CFPB’s concern that “unaffordable loans cause substantial injury to consumers by spurring extended sequences of reborrowing, bank account fees and closures, vehicle repossessions, collections, and various other harms.” The CFPB may also be seeking an opportunity to more formally demonstrate its authority under the abusiveness standard, addressing prior criticisms that the CFPB was demonstrating that authority by enforcement actions rather than by rulemaking.
6. The process: what are the next steps for companies?
The CFPB is convening a Small Business Review Panel to solicit feedback from small lenders. In addition, the CFPB will seek input from a wide range of stakeholders before issuing a proposed rulemaking. Once the CFPB’s formal proposed regulations have been issued, the public will be invited to submit written comments before a final rule is promulgated.
Given the rulemaking process, the final rule is many months away, but companies should begin analyzing and understanding the CFPB proposals now, with help from counsel – so that deliberations are protected by the attorney-client privilege. Businesses should ensure enough time is allotted to determine whether comment making would be a productive effort for their interests and to strategize their participation in the rulemaking to maximize the company’s likelihood of having its viewpoints incorporated into the final rules. Because the proposals issued today are quite fulsome, the companies have the advantage of leveraging the information released to plan and implement an effective regulatory and compliance strategy necessary to minimize CFPB-related disruptions to their businesses.
