The Consumer Financial Protection Bureau (CFPB) issued its final rule on payday, vehicle title, and certain high-cost installment loans. The new rule is effective in 2019 and imposes stringent underwriting requirements and payment restrictions on certain covered loans. Be sure to review our previous blog post “CFPB Releases Long Awaited Small Dollar Rule: 5 Things You Need to Know” for additional information. Fortunately, unlike the CFPB’s original proposals, the final rule seems to have very limited applicability to most automobile lenders.
Proposal for Longer-Term Loans
Under the proposed rule, it was an unfair and abusive practice for a lender to make covered longer-term loans without making an ability to repay determination. The proposal would have applied the ability to repay determination to high-cost loans where the lender took a leveraged payment mechanism, including vehicle security which includes any security interest in a motor vehicle or motor vehicle title. Thus, high-cost, longer-term loans secured by a motor vehicle were potentially subject to the ability to repay determination requirements. Fortunately, the CFPB chose to stand down, at least for now, on implementing these particular standards for longer-term loans.
Underwriting/Ability to Repay Determination
The underwriting requirements of the final rule, including the ability to repay determination requirements, only apply to short-term vehicle title loans. Short term covered loans are loans that have terms of 45 days or less, including typical 14-day and 30-day payday loans, as well as short-term vehicle title loans that are usually made for 30-day terms.
The CFPB originally proposed to make these underwriting requirements, including the ability to repay determination, applicable for covered longer-term loans — loans with terms of more than 45 days–but elected not to finalize those requirements. Instead these stringent underwriting requirements apply only to short-term loans and longer-term balloon payment loans.
Under the final rule, before making a covered short-term or longer-term balloon payment loan, a lender must make a reasonable determination that the consumer would be able to make the payments on the loan and be able to meet the consumer’s basic living expenses and other major financial obligations without needing to re-borrow over the ensuing 30 days. A lender must verify monthly income and debt obligations under certain criteria and determine the consumer’s ability to repay the loan.
Although there is a conditional exception from the ability to repay determination for certain short- term loans of less than $500, any short-term loan where the lender takes vehicle security must be originated in accordance with the ability to repay determination.
The payment restrictions portion of the rule applies to longer-term loans which exceed a cost of credit threshold and have a form of leveraged payment mechanism. The payment restrictions may have some application to loans secured by a vehicle to the extent that the longer-term, installment, vehicle-secured loan exceeds the 36 percent cost of credit threshold and the lender obtains a leveraged payment mechanism in connection with the loan. Having a leveraged payment mechanism means that the lender has the right to initiate a transfer of money from a consumer’s account to satisfy a loan obligation (not including a single, immediate transfer at a consumer’s request).
Covered loans subject to the payment restrictions of the new rule are limited to loans that involve types of leveraged payment mechanisms that enable a lender to pull funds directly from a consumer’s account. Accordingly, a loan that involves vehicle security may be a covered longer-term loan if it involves a leveraged payment mechanism, but not simply because it involves a vehicle security.
Under the rule, it is an unfair and abusive practice for a lender using its leveraged payment mechanism to make further attempts to withdraw payment from consumers’ accounts in connection with a covered loan, after the lender has made two (2) consecutive failed attempts to withdraw payment from the accounts, unless the lender obtains the consumers’ new and specific authorization to make further withdrawals from the accounts.
Note that loans made solely to finance the purchase of a car in which the car secures the loan are completely exempt from the coverage of the rule. Other exceptions include home mortgage loans, credit cards, student loans, and overdraft services and lines of credit.
Although the CFPB decided to finalize the underwriting/ability to repay determination requirements only for covered longer-term balloon payment loans, the CFPB has stated that it does plan further action in this area with regard to longer-term loans. The CFPB has indicated that it has remaining concerns about lending practices with respect to longer-term loans, will continue to scrutinize such loans, and plans future rulemaking. It remains to be seen whether the CFPB will actually continue to pursue rulemaking in this area or will be blocked by the current administration’s regulatory freeze and cutting efforts.