On June 2, 2016, the Consumer Financial Protection Bureau (“CFPB”) released its proposed rule on small dollar lending during its scheduled field hearing in Kansas City, Missouri. The controversial proposed rule will affect payday loans, single-payment vehicle title loans, deposit advance products, and certain-high cost loans.
Under the proposed rule, lenders would be responsible for making sure that borrowers take on only debt that they can afford to repay. The proposed rule would require lenders to make a “full-payment test” before making most small dollar loans. This test would verify that the borrower can afford to make each payment and still meet all major financial obligations including basic living expenses. The proposed rule further limits the number of times and under what conditions loans can be rolled over each month. For example, payday and single-payment vehicle title loans would be capped at three successive loans followed by a mandatory 30-day cooling off period before the borrower could take out a new loan.
The proposed rule includes some limited exceptions to the full payment test requirement if certain criteria are met. Under the “principal payoff option,” lenders could make short term loans up to $500 in low-risk situations if the debt is repaid in a single payment or with up to two extensions without fully verifying the borrower’s ability to repay. For longer term loans, the proposed rule gives lenders two options to avoid the full payment test. Lenders would be allowed to offer loans that meet the National Credit Union Administration’s “payday alternative loan” criteria of capping interest rates at 28 percent with an application fee of not more than $20. Additionally, lenders could also offer loans payable in equal installments with a term not to exceed 24 months as long as the lender’s projected rate of default on the loans was 5 percent or less. But, if the lender’s default rate exceeded 5 percent in a given year, the lender would be required to refund its origination fees.
The proposed rule, however, is not just focused on the types of loans lenders offer. Rather, the rule will also regulate how lenders attempt to collect payment from consumers’ accounts. Specifically, under the new rule, lenders would be required to give borrowers written notice three days before debiting a borrower’s account for any loan covered by the rule. After two straight unsuccessful attempts, the lender would be prohibited from attempting to debit the account unless the borrower specifically consented to a further attempt. According to remarks by CFPB Director Richard Cordray, this gives “consumers a chance to question or dispute any unauthorized or erroneous payment attempts and to make arrangements for covering payments that are due.”
But despite CFPB claims that this new rule “would put an end to the risky practices in these markets that trap consumers in debt they cannot afford,” the new regulation is not without controversy. As previously reported, an earlier outline of the proposed rule was harshly criticized. Consumers and members of the finance industry voiced concern that the proposed rule could harm small businesses, take away options from consumers, and possibly infringe on authority of states and tribal nations. Members of Congress also introduced legislation last November directed at curtailing the CFPB’s rulemaking. If enacted, the proposed Consumer Protection and Choice Act would drastically limit the strength of the regulation by delaying the rule for two years and excluding states that already have certain payday lending laws from the CFPB’s regulation.
The CFPB is currently accepting comments on its proposed rule, and a final rule is expected to follow.