The Consumer Financial Protection Bureau (CFPB) has finalized a rule on short-term (payday) lending to consumers, requiring lenders to determine upfront a borrower’s ability to repay. The final rule contains many of the same provisions that were in the bureau’s proposal in June 2016.
The rule is the bureau’s first based on its authority to prohibit “unfair, deceptive or abusive acts or practices” (UDAAP) under the Dodd-Frank Act.
Get a more detailed analysis of what this rule means for the industry, as well as insight from the Consumer Bankers Association.
“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” CFPB Director Richard Cordray said in a press release. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”
The bureau referred to “debt traps” in the release as the cycle incurred by consumers when they begin taking out new small-dollar loans to pay off old ones they could not afford. This often leads to borrowers being chased by debt collectors, having their vehicle repossessed and/or default.
“Under the new rule, lenders must conduct a ‘full-payment test’ to determine upfront that borrowers can afford to repay their loans without re-borrowing,” the release states. “For certain short-term loans, lenders can skip the full-payment test if they offer a ‘principal-payoff option’ that allows borrowers to pay off the debt more gradually.”
The rule stipulates that lenders must use a credit reporting system registered by the bureau when reporting and collecting information about certain loans covered by the rule. It also states that loans considered to be low-risk will be allowed to skip the full-payment test.
“Loans that pose less risk to consumers do not require the full-payment test or the principal-payoff option,” according to a fact sheet detailing the rule’s provisions. The rule also includes a “debit attempt cutoff” for any short-term loan, balloon-payment loan or longer-term loan with an annual percentage rate higher than 36 percent that includes authorization for the lender to access the borrower’s checking or prepaid account.
Short-term loans are defined as loans with terms of 45 days or fewer (including typical 14-day and 30-day payday loans, as well as short-term vehicle title loans that usually are made for 30-day terms). The short-term loans also include those with a single payment, and open-end credit lines where the credit terminates within 45 days of origination.
The rule is set to take effect 21 months after its publication in the Federal Register. The release notes that the provisions allowing for registration of information systems will become effective earlier.