The CFPB has finalized its small-dollar rule, which covers the Short-Term and Longer-Term Loan Rule (the "Payday Rule"), which applies requirements, prohibitions, and reporting obligations to certain small-dollar, shorter-term loans. Much of the rule has been finalized as proposed, which we discuss here. An important change, however, is that the final rule does not apply "ability-to-repay" or "ATR" requirements to all longer-term loans, which would have been covered under the proposal. The CFPB notes that it is conducting further study of longer-term loans.
The Payday Rule primarily employs the CFPB's authority to prohibit unfair, deceptive, or abusive acts or practices (UDAAPs). Accordingly, the final rule does not implement a specific statutory requirement to regulate payday lending, but rather formalizes the CFPB's determination that certain features and practices of these loans are inherently unfair or abusive. Further, the final rule does not preempt state regulation that is stricter than the Payday Rule; rather, the CFPB notes that the rule "operates as a floor" that states may potentially build on.
The final rule is housed in Section 1041 of the CFR, and broadly covers ability-to-repay (ATR) analysis/underwriting requirements, payment practices, and information reporting requirements for covered loans. The ATR analysis and reporting requirements apply to a smaller subgroup of loans than was proposed in the CFPB's Notice of Proposed Rulemaking—these requirements apply to payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments.
The rule’s payment practices restrictions cover a wider universe of short-term loans, balloon-payment loans, and high-cost longer-term loans (any loan with an annual percentage rate over 36%, for which the lender may access a consumer’s account or repayment).
Lenders making covered loans must also comply with the rules on record retention and compliance program requirements. The final rule covers loans made by banks, credit unions, and nonbanks regardless of whether the institution operates online or out of storefronts, and regardless of what state licenses the institution may hold. Lenders that make 2,500 or fewer covered short-term or balloon-payment loans per year and derive no more than 10% of their revenue from these types of loans are exempt from the rule. “Payday alternative loans” authorized by the National Credit Union Administration are also exempt, as are several other types of consumer credit, including: loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan; home mortgages and similar real property-secured loans; credit cards; student loans; non-recourse pawn loans; overdraft services and lines of credit; wage advance programs; no-cost advances; and accommodation loans.
For short-term loans and longer-term balloon loans, lenders must either conduct a thorough ATR analysis under new standards established and prescribed by the rule, or make the loan under one of the alternative loan safe harbors. The ATR analysis prescribed by the rule includes specific underwriting criteria that lenders must use to determine a consumer’s repay the loan in full while managing other expenses. Loans requiring ATR analysis must also be reported to CFPB-registered credit bureaus.
One component of the prescribed ATR criteria that may prove difficult to implement is the rule’s “Full-Payment Test,” under which lenders are specifically required to determine whether the borrower can pay all loan payments due under the agreement— both during the term of the loan and for 30 days after the highest payment on the loan, including any balloon—and still meet basic living expenses and major financial obligations. This determination must be based on the lender’s verification of income and major financial obligations and estimate basic living expenses for the month in which the highest payment is due. For loans evaluated under the Fully-Payment Test, the rule mandates a 30-day cooling-off period after a borrower has taken out a third loan in a short time period.
As an alternative, the rule provides a “Principal-Payment Test,” under which lenders may omit the full ATR analysis for certain short-term loans of no more than $500. These loans must be accompanied by disclosures, and contain features/limitations that the Bureau considers less risky, including:
Lenders may not obtain an auto title as collateral.
- Loans may not be structured as open-end credit.
- Lenders also cannot offer the option to consumers who have recent or outstanding short-term or balloon-payment loans.
- Must have a cooling-off period (no more than three loans in quick succession). Furthermore, the lender may offer two additional loans, but only if the borrower pays off at least one-third of the original principal with each extension.
- The consumer can have no more than six short-term loans or have been in debt for more than 90 days on short-term loans over a rolling 12-month period (from any lender).
- Principal-payoff loans may not be made if no registered information systems are available from which to obtain a credit report on the borrower.
For covered loans, including high-cost, longer-term loans, lenders must give a consumer written notice before the first attempt to debit the consumer's account to collect payment, including the timing, amount, and channel of the upcoming payment transfer. The final rule makes it an unfair and abusive practice to attempt, without "new and specific authorization," to withdraw payment from a borrower's account after the first two attempts have failed. The rule applies regardless of the payment channel the first two attempts employed.
The final rule requires lenders to report short-term loans and longer-term balloon loans to a consumer reporting agency that has registered with the CFPB (called a "registered information system"). Such reporting is an integral part of the rule's ATR requirements.
The bulk of the new rule will become effective 21 months after publication of the final rule in the Federal Register. Industry participants will certainly seek to challenge the final rule through legislative means and/or litigation.