On January 16, the CFPB announced plans to “reconsider” its newly minted regulation for Payday, Vehicle Title, and Certain High-Cost Installment Loans (the Payday Rule). Technically, the Payday Rule went into effect that same day. However, compliance with the rule’s most important provisions is not required until August 19, 2019, so the CFPB’s decision to revisit the rule at this early juncture should not derail ongoing compliance efforts.
Because the final Payday Rule was published in the Federal Register, the CFPB cannot revise the rule absent rulemaking for that purpose. In the rule’s current form, compliance would be extremely burdensome. The CFPB openly acknowledged this fact in its explanation of the final rule in the Federal Register. Specially, the CFPB noted that “there will be a substantial reduction in the volume of covered short-term payday loans” and, for covered short-term vehicle title loans, even more lending “will be curtailed.”
Among other things, for certain types of high-cost installment loans, the Payday Rule requires a complex ability-to-repay analysis to be performed for each and every loan. Creditors offering such loans are also required to obtain both a traditional credit report and a new type of report from a “registered information system” (RIS). In addition, the rule places significant constraints on the ability of lenders to utilize automated clearing house payments for loans with interest rates greater than 36 percent. (For more details, see our recent Pepper Alert discussing the rule.)
We expect the new rulemaking to propose a delay in the Payday Rule’s effective compliance date. To this end, in announcing its decision to initiate rulemaking, the CFPB noted that the existing Payday Rule allows it to waive the rule’s April 16, 2018 deadline for a credit reporting agency to apply to become an RIS. Furthermore, the CFPB will likely seek to shift the rule’s emphasis away from underwriting and toward providing more robust disclosures. The latter approach was expressly rejected by the CFPB’s former leadership team — i.e., in its Federal Register commentary, the CFPB repeatedly asserted that consumer research and past experience demonstrate that disclosures are ineffective in preventing the harms caused to consumers by certain types of high-cost loans.
The existing Payday Rule progressed from a proposed rule to a final regulation in a relatively quick 16 months. A full year or more could pass between a new proposed rulemaking and the actual publication of a revised regulation.
In order to justify shifting the focus of the Payday Rule from underwriting to disclosures, the CFPB’s new leadership may feel compelled to perform its own consumer research. This research would further extend the time for arriving at a revised rule, and the results would surely be met with severe skepticism by consumer advocacy groups.
If the Payday Rule is revised to be less rigorous, state legislators may look to fill the perceived gap in regulation by enacting tougher local laws. We expect that such legislation would take the form of more demanding usury limits. Alternatively, states could seek to prohibit certain categories of high-cost lending, e.g., payday lending is unlawful in Georgia.
- With respect to applying to become an RIS, the CFPB’s press release elaborated that because the “application deadline might cause some entities to engage in work in preparing an application to become [an] RIS, the Bureau will entertain waiver requests from any potential applicant.” The need to obtain a new, CFPB-designed specialized credit report is among the most controversial aspects of the existing Payday Rule, so we expect the CFPB to revisit the concept of an RIS.