The Consumer Financial Protection Bureau (CFPB) today finalized its rule covering loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments. Specifically, the rule imposes onerous ability-to-repay requirements before issuing covered loans and requires new debit disclosures and limitations.
Under the new rule, lenders will be required to conduct a comprehensive “full-payment test” to determine upfront that borrowers can afford to repay their loans without re-borrowing. This requires lenders to verify income, major financial obligations, and estimate living expenses for a one-month period. For certain short-term loans up to $500, lenders can skip the full-payment test if they offer a “principal-pay off option” that allows borrowers to pay off the debt more gradually. Lenders will also be required to use credit reporting systems registered by the CFPB to report and obtain information on certain loans covered by the proposal.
However, “less risky” loan options, including certain loans typically offered by community banks and credit unions, will be able to forgo the full-payment test and the principal pay-off option.
The new rule also more broadly prohibits a lender from debiting an account after two straight unsuccessful accounts unless new authorization is provided for any short-term loan, balloon-payment loan, or longer-term loan with an annual percentage rate higher than 36 percent.
The rule will generally take effect 21 months after it is published in the Federal Register, however the provisions that allow for “registration of information systems,” will take effect 60 days after publication.
ACA International’s Viewpoint
While ACA International is studying the 1,690-page rule, ACA continues to believe the final rule is fundamentally flawed due to the rulemaking’s procedural deficiencies. In October 2016, ACA filed comments arguing that the CFPB acted in an arbitrary and capricious manner by ignoring input that detracted from its predisposed policy position and that it failed to make a good-faith effort to adhere to its obligations under the Small Business Regulatory Enforcement Fairness Act. Instead of taking the appropriate steps to remedy the flawed rulemaking process so that any new regulations would reflect the operational realities of the payday lending market, demonstrate an accurate understanding of consumer need, and conform to the important SBREFA requirements established by Congress, the CFPB decided to nevertheless move forward with issuing the final rule.
Given these deficiencies, along with the substantive problems posed by the rule, a legal challenge by the payday industry, along with a legislative challenge to the rule by Congress under the Congressional Review Act, is likely to be forthcoming.
ACA International continues to analyze the rule and will provide additional information in its Daily e-newsletter. Please check your inbox for updates Friday, Oct. 6.