The Consumer Financial Protection Bureau has long made it known that its rogues gallery includes payday lenders. A rule proposed on June 2 includes its toughest attack yet on the industry.
The proposed regulations would apply to certain short-term and longer-term credit products that are “aimed at financially vulnerable consumers.” Those products include payday and auto title loans, and installment loans with a total, all-in annual percentage rate that exceeds 36 percent. These arrangements, it says, are “pushing borrowers into debt traps.”
“Chief among these concerns is that consumers are being set up to fail with loan payments that they are unable to repay,” a statement from the Bureau says. “The CFPB is concerned that these practices also lead to collateral damage in other aspects of consumers’ lives such as steep penalty fees, bank account closures, and vehicle seizures."
Proposed ability-to-repay protections include a “full-payment” test that would require lenders to determine upfront that consumers can afford to repay their loans without re-borrowing. The proposal also includes a “principal payoff option” for certain short-term loans and two less risky longer-term lending options so that borrowers who may not meet the full-payment test can access credit without getting trapped in debt. Lenders would be required to use credit reporting systems to report and obtain information on certain loans.
The rule 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 five percent or less. The lender would have to refund the origination fees any year that the default rate exceeds fivepercent. Lenders would be limited as to how many of either type of loan they could make per consumer per year.
As proposed, lenders covered by the the rule would need to give consumers written notice before attempting to debit the consumer’s account to collect payment for any loan covered by the proposed rule. After two straight unsuccessful attempts, the lender would be prohibited from debiting the account again unless the lender gets a new and specific authorization from the borrower.
Public comments on the proposals are due on Sept. 14, 2016 and will be weighed carefully before final regulations are issued. The CFPB also announced a Request for Information on other potentially high-risk loan products and practices that are not specifically covered by the proposed rule. Comments on the inquiry are due by Oct. 14, 2016.