Wasting no time, President Trump’s pick to head the Consumer Financial Protection Bureau has taken the first step towards delaying, if not killing, its controversial “payday rule.”
The following statement was released by Director Mick Mulvaney on Jan. 16: “January 16, 2018 is the effective date of the Bureau of Consumer Financial Protection’s final rule entitled, Payday, Vehicle Title, and Certain High-Cost Installment Loans. The Bureau intends to engage in a rulemaking process so that the Bureau may reconsider the Payday Rule.”
“Although most provisions of the Payday Rule do not require compliance until August 19, 2019, the effective date marks codification of the Payday Rule in the Code of Federal Regulations,” he added. “Today’s effective date also establishes April 16, 2018, as the deadline to submit an application for preliminary approval to become a registered information system under the Payday Rule. However, the Bureau may waive this deadline… Recognizing that this preliminary application deadline might cause some entities to engage in work in preparing an application to become a RIS, the Bureau will entertain waiver requests from any potential applicant.”
Under the watch of former Director Richard Cordray, the CFPB enacted the controversial rule in October. It was, in his words, “aimed at stopping payday debt traps by requiring lenders to determine upfront whether people can afford to repay their loans.”
Payday loans are typically for small-dollar amounts and due in full by the borrower’s next paycheck, usually two or four weeks. They can be expensive, with annual percentage rates that can reach 300 percent or higher. Single-payment auto title loans also have expensive charges and short terms, but borrowers are also required to put up their car or truck title for collateral. Some lenders also offer longer-term loans of more than 45 days where the borrower makes a series of smaller payments before the remaining balance comes due. These longer-term loans, often referred to as balloon-payment loans, may require access to the borrower’s bank account or auto title.
Under the CFPB’s rule, lenders must conduct a “full-payment test” to determine upfront that borrowers can afford to repay their loans without re-borrowing. 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 requires lenders to use credit reporting systems registered with the Bureau to report and obtain information on certain loans covered by the proposal.
The rule allows less risky loan options, including certain loans typically offered by community banks and credit unions, to forgo the full-payment test. It also includes a “debit attempt cutoff” for any short-term loan, balloon-payment loan, or longer-term loan with account access and an annual percentage rate higher than 36 percent that includes authorization for the lender to access the borrower’s checking or prepaid account.
Lenders are required to determine whether the borrower can pay the loan payments and still meet basic living expenses and major financial obligations both during the loan and for 30 days after the highest payment on the loan. For payday and auto title loans that are due in one lump sum, full payment means being able to afford the total loan amount, plus fees and finance charges within two weeks or a month. For longer-term loans with a balloon payment, full payment means being able to afford the payments in the month with the highest total payments on the loan.
The rule also caps the number of short-term loans that can be made in quick succession at three.
Critics, including many consumer advocates, are not happy about the possibility the CFPB will delay or rescind the rule.
“As a Congressman, Mick Mulvaney took thousands of dollars from the payday industry. Now, as ‘acting director’ of the CFPB, he is returning the favor by sabotaging these important protections that would have guarded against predatory lenders and protected struggling consumers from falling into the cycles of debt with sky-high interest rates,” said Karl Frisch, executive director of Allied Progress, in a statement.
“The CFPB thoroughly and thoughtfully considered every aspect of this issue over the course of several years,” he added. “There is no reason to delay implementation of this rule, unless you are more concerned with the needs of payday lenders than you are with the interests of the consumers these financial bottom-feeders prey upon.”