The Consumer Financial Protection Bureau has issued a proposed rule and a request for information related to payday lending, title loans, and other short-term lending products.
Under the terms of the proposed rule, lenders would be required to verify that borrowers are fully capable of repaying the entire amount being borrowed before making the loan. The objective is to keep consumers from having to re-borrow money to pay off the first loan, and would cap the number of loans that can be made in succession.
When collecting on short-term loans, consumers would have to receive written notice before any attempt to debit a bank account to obtain payment. And if two unsuccessful attempts are made, borrowers will have to give a new authorization before any subsequent attempts are made at debiting an account. The intention is to keep consumers from incurring overdraft or insufficient funds charges from their financial institutions if they do not have the payment in their accounts.
Among the protections included in the proposed rule are:
- Full-payment test: Under the proposed full-payment test, lenders would be required to determine whether the borrower can afford the full amount of each payment when it’s due and still meet basic living expenses and major financial obligations. For short-term loans and installment loans with a balloon payment, full payment means affording the total loan amount and all the fees and finance charges without having to reborrow within the next thirty days. For payday and auto title installment loans without a balloon payment, full payment means affording all of the payments when due. The proposal would further protect against debt traps by making it difficult for lenders to push distressed borrowers into reborrowing or refinancing the same debt. The proposal also would cap the number of short-term loans that can be made in quick succession.
- Principal payoff option for certain short-term loans: Under the proposal, consumers could borrow a short-term loan up to $500 without the full-payment test as part of the principal payoff option that is directly structured to keep consumers from being trapped in debt. Lenders would be barred from offering this option to consumers who have outstanding short-term or balloon-payment loans or have been in debt on short-term loans more than 90 days in a rolling 12-month period. Lenders would also be barred from taking an auto title as collateral. As part of the principal payoff option, a lender could offer a borrower up to two extensions of the loan, but only if the borrower pays off at least one-third of the principal with each extension.
- Less risky longer-term lending options: The proposal would also permit lenders to offer two longer-term loan options with more flexible underwriting, but only if they pose less risk by adhering to certain restrictions. The first option would be offering loans that generally meet the parameters of the National Credit Union Administration “payday alternative loans” program where interest rates are capped at 28 percent and the application fee is no more than $20. The other option would be offering loans that are payable in roughly equal payments with terms not to exceed two years and with an all-in cost of 36 percent or less, not including a reasonable origination fee, so long as the lender’s projected default rate on these loans is 5 percent or less. The lender would have to refund the origination fees any year that the default rate exceeds 5 percent. Lenders would be limited as to how many of either type of loan they could make per consumer per year.
Along with issuing the proposed rule, the CFPB also issued a Request for Information, seeking answers to questions about the types of loans and types of practices that are not being covered under the proposed rule. This includes seeking information about wage garnishments, seizing funds from consumers’ bank accounts, obtaining liens on vehicles, and whether or not the frequency of those practices would increase under the proposed rule.
Comments on the Request for Information are due by October 14.
Consumer advocates were “cautiously optimistic” about the proposed rule, largely supporting the CFPB’s efforts, but saying that there were still opportunities for consumers to be taken advantage of.