On Thursday, June 2, the Consumer Financial Protection Bureau (CFPB) released proposed rules affecting the payday and short-term loan industry as part of its authority to prohibit the use of unfair or abusive acts and practices in connection with the provision of consumer financial products and services under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
According to the proposal, for short-term loans (loans with a term of 45 days or less), the lender would need to apply a “full payment test” to determine if the applicant has the ability to repay the loan without reborrowing. Under this test, a lender would be required, at the time of the consumer’s application, to determine whether the borrower will be able to pay the full amount of the loan when due. As an alternative, a lender could offer a loan with a “principal payoff option” for loans of up to $500 under certain conditions prescribed by the CFPB to ensure that consumers are not subject to an extended repayment schedule (e.g., the lender would be able to offer two extensions under certain conditions).
Under the proposal, “longer-term loans” are defined as those with terms that exceed 45 days and have an “all in” APR that exceeds 36% that is either secured by a consumer’s vehicle title or gives the lender the right to debit the consumer’s bank account for repayment. For longer-term loans, a lender could apply the “full payment test” described above. A second option permits the lender to use an alternative framework proposed by the CFPB.
Finally, the CFPB has proposed that, for loans covered by the proposed rule, the lender would have to give borrowers advance notice before accessing their account to collect a payment due. After two returns, the lender would be required to obtain a new payment authorization.
Katten will publish an advisory providing deeper analysis of these proposed rules.
Comments are due September 14.
The proposed rules are available here.