United States: CFPB Releases Final Payday Lending Rule

Last Updated: October 16 2017
Article by Richard L. Fischer, Obrea O. Poindexter and Calvin Funk

On October 5, 2017, the Consumer Financial Protection Bureau ("CFPB") released its final rule for short-term loans ("Final Rule"). While more time is necessary to fully digest the nearly 1,700 page rule, it appears to follow the proposed short-term lending rule ("Proposed Rule"),1 with several notable changes. Most notably, the CFPB did not finalize rules relating to underwriting requirements for long-term loans that do not have balloon payments.

KEY REQUIREMENTS UNDER THE FINAL RULE

Ability-to-Repay Loans

Under the Final Rule, it is an unfair and abusive practice for a lender to make short-term loans, or longer-term balloon-payment loans, without first making an ability-to-repay determination. As part of this ability-to-repay test, the lender must verify income, and estimate basic living expenses, to ensure that the borrower will be able to meet major financial obligations as well as basic living expenses for a specified time period based on the type of loan under consideration.

Additionally, lenders must comply with a 30-day cooling-off period before making a short-term loan, or longer-term balloon-payment loan, if the consumer has already taken out three short-term loans or longer-term balloon-payment loans that were outstanding within 30 days of each other.

Conditionally Exempt Loans

The Final Rule conditionally exempts from the ability-to-repay requirements short-term loans under $500 where no security interest is taken in the consumer's vehicle and where other structural requirements specified in the Final Rule are satisfied. Lenders making conditionally exempt loans still need to review the consumer's borrowing history, both in the lender's own records and in a consumer report from a registered information system contemplated under the Final Rule.

Reporting Requirements

The Final Rule permits companies to become designated as "registered information systems" by the CFPB. Lenders making short-term loans and longer-term balloon-payment loans will need to furnish loan information to such a registered information system, and will also be required to obtain and review a consumer report from a registered information system, prior to making either a covered ability-to-repay loan or a conditionally exempt loan.

Payment Restrictions

The Final Rule also creates certain payment restrictions aimed at protecting consumers from suffering multiple insufficient funds fees or bank account closures. Specifically, the Final Rule requires that lenders provide written notice before debiting a consumer's account to collect payment for a loan covered by the Final Rule. Additionally, a lender must cease debiting a consumer's account after two consecutive unsuccessful attempts, including debits that are declined due to insufficient funds.

SCOPE

The underwriting portion of the Final Rule, including the ability-to-repay requirements, apply to short-term loans (i.e., loans with terms of 45 days or less) and longer-term balloon-payment loans (i.e., loans with terms longer than 45 days that have a balloon payment). Other portions of the Final Rule (including the payment restrictions) apply not only to short-term loans and longer-term balloon-payment loans, but also longer-term loans with an APR over 36% that includes authorization for the lender to access the borrower's checking or prepaid account.

The Final Rule excludes from coverage (1) purchase money security interest loans, such as loans to purchase a car or personal property secured by the subject of the purchase; (2) credit secured by any real property; (3) credit card accounts; (4) student loans; (5) non-recourse pawn loans; (6) overdraft services and overdraft lines of credit; (7) wage advance programs; (8) no-cost advances; (9) alternative loans (i.e., loans similar to those made under the Payday Alternative Loan program administered by the National Credit Union Administration); and (10) accommodation loans.

SOME KEY CHANGES FROM THE PROPOSED RULE

Most significantly, the CFPB did not establish similar underwriting criteria applicable to longer-term loans that would have been covered under the Proposed Rule. The CFPB indicated that they are conducting further study of longer-term loans and may finalize rules for longer-term loans in the future. Thus, the Final Rule applies to short-term loans and longer-term loans with balloon payments.

Nevertheless, the scope of the rule has expanded in some respects; thus, many of the provisions that applied only to short-term loans under the Proposed Rule now also apply to longer-term balloon-payment loans. Additionally, under the Proposed Rule, a loan was only a longer-term balloon-payment loan if it had a total cost of credit in excess of 36% and either took a security interest in the consumer's vehicle or obtained a means to directly access a consumer's source of income. Under the Final Rule, this definition has become broader and all that is required for a loan to be a longer-term balloon-payment loan is that the loan has a duration longer than 45 days with a balloon payment.

In the Proposed Rule, the definition of "longer-term loans" would have established a new rate calculation figure, the "total cost of credit," which would have included more charges than the ones that must be included in the annual percentage rate ("APR"). The Final Rule abandons that confusing calculation approach and, instead, utilizes the more familiar APR calculation as the means of defining the rate at which a loan becomes a "longer-term loan."

The Final Rule also removes the presumptions of unaffordability and makes some modifications to the method by which an ability-to-repay calculation is performed.

EFFECTIVE DATE

The provisions of the Final Rule related to the registration of information systems will become effective 60 days after the Final Rule is published in the Federal Register, and the rest of the Final Rule will become effective 21 months after publication in the Federal Register.

FINAL CFPB RULE SPURS THE OCC TO ACTION

On the same day the CFPB released the Final Rule, the Office of the Comptroller of the Currency ("OCC") reacted by rescinding the OCC's supervisory guidance regarding deposit advance products ("Rescinded Guidance"), effective immediately. The Rescinded Guidance highlighted the similarities between deposit advance products and traditional payday loans and warned banks of the elevated credit, reputation, operational, and compliance risks associated with these loans.

In announcing the rescission, Acting Comptroller of the Currency Keith Noreika stated that the release of the CFPB's Final Rule "necessitates revisiting the OCC guidance" in order to prevent national banks and federal savings associations from being subject to "potentially inconsistent regulatory direction." The Acting Comptroller also noted that, in his opinion, since the release of the Rescinded Guidance, "it has become difficult for banks to serve consumers' need for short-term, small-dollar credit," and many consumers have therefore had to turn to less regulated entities. The Acting Comptroller even went so far as to state that the OCC's earlier guidance on deposit advances "may even hurt the very consumers it is intended to help."

Footnote

1. See our client alert for a detailed review of the Proposed Rule.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions