United States: CFPB Proposes Revisions To Small-Dollar Loan Rule

On February 6, 2019, amidst strong opposition from representatives of consumer groups and some members of Congress, the Consumer Financial Protection Bureau (CFPB) issued a proposed rule to revise its controversial November 2017 small-dollar loan rule (2017 Rule). The proposed rule would effectively rescind the 2017 Rule's requirement that lenders determine a borrower's ability to repay prior to extending small-dollar and certain other types of covered loans. The proposed rule would not amend the payment provisions of the 2017 Rule, which include a requirement that lenders obtain a new authorization from a consumer to initiate a payment transfer from an account where there have been two consecutive failed attempts to withdraw funds from the same account. The CFPB also proposed to delay the compliance date for the 2017 Rule's existing ability to repay provisions. 

The CFPB's 2017 Rule, promulgated under former Director Richard Cordray, became effective on January 16, 2018, with most provisions having a mandatory compliance date of August 19, 2019.

Proposed Changes to the Rule

The CFPB proposes to rescind the provisions in the 2017 Rule related to the required ability to pay assessment for covered short-term and longer-term balloon payment loans, and associated reporting and recordkeeping requirements ("Ability to Pay Provisions"). Specifically, the proposal would rescind the following:

  • Identification of Unfair and Abusive Practice: The provision under which it is an unfair and abusive practice for a lender to make a covered short-term loan or longer balloon-payment loan without making a reasonable determination that consumers will have the ability to repay the loans according to their terms. 12 C.F.R. § 1041.4.
  • Ability to Repay Determination Requirement: The provisions that prescribe the mandatory underwriting requirements for making ability to repay determinations to prevent unfair and abusive practices. The provisions require lenders to do the following when a consumer applies for a loan: obtain a written statement from a consumer with respect to his or her income and financial obligations, obtain verification of the income and financial obligations, obtain a report on the consumer from a national consumer reporting agency and a report from a registered information system, and review its own records and records of its affiliates to determine whether the consumer has any required payments under debt obligations. A lender must then make a reasonable determination of the consumer's net income and major financial obligations, calculate the consumer's debt-to-income ratio or residual income, estimate the consumer's living expenses, and determine, based on this information, whether a consumer would be able to make payments under the covered loan and his or her payment obligations and meet his or her basic living expenses. 12 C.F.R. § 1041.5.

As a result of the proposed rescission of these two sections, the CFPB also proposes to rescind the below provisions as they would no longer serve the purposes for which they were included in the 2017 Rule:

  • Conditional Exemption: The provision that exempts certain covered short-term loans from the mandatory underwriting requirements. 12 C.F.R. § 1041.6.
  • Reporting and Furnishing Provisions: The provisions that require lenders making covered short-term loans or longer-term balloon-payment loans to furnish certain information regarding the loans to registered information systems and establish a process for registering such systems. 12 C.F.R. §§ 1041.10, 1041.11.
  • Recordkeeping: The portions of the recordkeeping provisions that are related to the mandatory underwriting requirements. 12 C.F.R. §§ 1041.12(b)(2)–(3).

As noted above, the CFPB is not proposing to change any of the payment provisions of the 2017 Rule.  However, the CFPB has indicated that it will separately examine certain issues, such as whether to exempt debit card payments from the payment provisions and other issues related to the rule that have been brought to its attention by industry participants, and may initiate a separate rulemaking upon review.

CFPB's Rationale for the Rule Changes

The CFPB puts forth several reasons for rescinding the ability to repay provisions. According to the proposed rule, the CFPB believes that the 2017 Rule's ability to repay provisions would have the effect of eliminating lenders, thereby decreasing consumer's access to credit and competition in credit markets.

The CFPB notes that the evidence which supported the promulgation of the identification of unfair and abusive practice provisions of the 2017 Rule "is not sufficiently robust and reliable to support that determination, in light of the impact those provisions will have on the market for covered short-term and longer-term balloon-payment loans, and the ability of consumers to obtain such loans."  In addition, the CFPB noted that, had the evidence been sufficiently robust, the CFPB now believes that it used "problematic approaches ... in applying the standards of unfairness and abusiveness." The CFPB further noted that it has not become aware of any additional evidence that would lead it to conclude such a provision was warranted.

Finally, the CFPB also mentioned that it had received input from industry participants about the onerous nature of the 2017 Rule and the "broader effects" of certain provisions on covered loans.

Impact on Lenders

The proposed rescissions would substantially decrease the significant burdens on lenders that would be imposed by the existing ability to repay requirement.  As noted, the 2017 Rule would require lenders to obtain extensive information about a consumer's finances and use the information to project whether the consumer will be able to make payments for his or her existing payment obligations and the payments under the covered loan and still meet basic living expenses for a period of thirty days.  The proposed rule may encourage lenders previously discouraged by the requirements under the 2017 Rule to engage in small-dollar, short-term loans.

Lenders would still be subject to the 2017 Rule's payment provisions, which require a lender to obtain a new customer authorization to attempt to withdraw funds from a consumer's account following two consecutive failed attempts to withdraw payments from that account. The provisions also require lenders to provide consumers with a written notice prior to a first attempt to withdraw payment from a checking, savings, or prepaid account and before subsequent attempts to withdraw payments if the payment amounts, dates, or payment channels differ from the first attempt.

Strong Opposition

Representatives of consumer groups and some Democratic members of Congress strongly oppose the proposed rule and have criticized CFPB Director Kraninger for proposing to roll back the Ability to Pay Provisions. Specifically, Senator Durbin (D-IL), a member of the Senate Appropriations Subcommittee on Financial Services and General Government, stated that "[b]y gutting key protections of the CFPB payday lending rule, Director Kraninger has sided with special interests at the expense of hardworking American families."  Furthermore, Representative Maxine Waters (D-CA), Chairwoman of the House Financial Services Committee, issued a statement "urg[ing] Director Kraninger to rescind this proposal and work on implementing a comprehensive federal framework -- including strong consumer safeguards, supervision, and robust enforcement -- to protect consumers from the cycle of debt."

Comments on this proposed rule are due 90 days from publication in the Federal Register.

Proposed Effective Date Delay

The second proposed rule would delay the current August 2019 compliance date for the Ability to Pay Provisions of the existing small-dollar loan rule to November 19, 2020.  According to the CFPB, this proposed rule was issued to prevent industry participants from incurring costs to comply with the 2017 Rule, portions of which may be amended or rescinded, and to account for certain implementation challenges raised by participants such as complying with state payday laws with compliance dates prior to August 2019.

Comments on this proposed rule are due 30 days from publication in the Federal Register.

Please contact us if you have any questions about the CFPB's 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

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