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CFPB Releases Final Rule on Small-Dollar Lending

The Consumer Financial Protection Bureau (CFPB) has unveiled its finalized rule on short-term, small-dollar loans on October 5. This rule was proposed in summer 2016, and the agency accepted comments through October 2016. The full text of the rule can be found here. The rule will be effective starting in July 2019.

The rule will cover two categories of short-term loan – any with a term under 45 days, and those that have a term over 45 days that also have an interest rate higher than 36 percent, and are repaid directly from the consumer’s income or account or use the consumer’s vehicle as collateral (an auto title loan). In an addition to the final rule versus the proposed rule, several classes of exemptions will now be included. The rule will not apply to:

(1) loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan; (2) home mortgages and other loans secured by real property or a dwelling if recorded or perfected; (3) credit cards; (4) student loans; (5) non-recourse pawn loans; (6) overdraft services and lines of credit; (7) wage advance programs; (8) no-cost advances; (9) alternative loans (similar to loans made under the Payday Alternative Loan program administered by the National Credit Union Administration); and (10) accommodation loans.

The CFPB recently released their “National Financial Well-Being Survey,” which tracks the financial habits and status of American consumers. According to that study, 43 percent of Americans are having trouble making ends meet. Five percent report using a short-term lending product of the type the CFPB is proposing to regulate, and 20 percent use some sort of non-bank financial product such as check cashing or a prepaid card. 80 percent of Americans told the CFPB that they “rarely or never” have “negative financial services experiences.”

The new rule will:

  • Make it an “an unfair and abusive practice for a lender to make covered short term or longer-term balloon-payment loans without reasonably determining that the consumers will have the ability to repay the loans according to their terms. “
  • Lay out underwriting requirements, such as requiring that a lender make a “reasonable determination” that the borrower would be able to make payments as well as meet basic living expenses and other financial obligations, without needing to re-borrow over the following 30 days, before they may make a loan.
  • Prohibit a lender from making a loan if the consumer has taken out “three covered short-term or longer-term balloon-payment loans within 30 days of each other, for 30 days after the third loan is no longer outstanding.”
  • A lender may make a covered short-term loan without meeting the rule’s stipulations but only under a certain narrow set of qualifiers, described as certain prescribed terms, the lender confirms that the consumer meets specified borrowing history conditions, and the lender provides required disclosures to the consumer.”
  • The rule considers it an “unfair and abusive practice” for a lender to attempt to withdraw payments from a consumers’ account after two such consecutive attempts have been made and failed due to a lack of funds – unless the lender obtains new authorization to do so.
  • A lender is also required to provide written notice a certain number of days before their first attempt to directly withdraw payment for a covered loan, if the amount is different than the regularly scheduled amount, made on a date other the regularly scheduled one, by a different payment channel, to “re-initiate” a previous payment that was returned.
  • The CFPB has disclosed the predicted impact of their regulation. According to the agency, there “will be a substantial reduction in the volume of short-term payday and vehicle title loans (measured in both number and total dollar value), and a corresponding decrease in the revenues that lenders realize from these loans.” CFPB data estimates that payday loan volumes will decrease by 62 to 68 percent (with an equivalent decrease in revenue); the Bureau also estimated a decrease in vehicle title loans of 89 to 93, again with an equivalent decrease in revenues). Of course, these decreases in loan volumes correspond with a predicted decrease in the number of lending “storefronts.” Perhaps most notably, the Bureau admitted that the decline in storefronts, “may limit some physical access to credit for consumers, and this limit may be felt more acutely by consumers in rural areas.”

    To read the full, 1,690 page (an increase over the 1,340 pages of the proposed version) final rule, click here.

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