Today the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) issued a new rule that will have a significant impact on the payday lending market. The CFPB will now require lenders to conduct a “full-payment test” to determine upfront whether the borrower will have the ability to repay the loan when it becomes due. Lenders can skip this test if they offer a “principal-payoff option.” The new rule also limits the number of times that a lender can access a borrower’s bank account.
The new rule covers loans that require consumers to repay all or most of the debt at once, including payday loans with 45-day repayment terms, auto title loans with 30-day terms, deposit advance products, and longer-term loans with balloon payments. The CFPB claims that these loans lead to a “debt trap” for consumers when they cannot afford to repay them. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford,” said CFPB Director Richard Cordray in a statement.
Payday loans are typically for small-dollar amounts and require repayment in full by the borrower’s next paycheck. The lender charges fees and interest that the borrower must repay when the loan becomes due. Auto title loans operate similarly, except that the borrowers put up their vehicles as collateral. As part of the loan, borrowers allow the lender to electronically debit funds from their checking account at the end of the loan term.
The Full-Payment Test
Under the new rule, lenders must now determine whether the borrower can make the loan payment and still afford basic living expenses and other major financial obligations. For payday and auto loans that are due in one lump sum, the test requires that the borrower can afford to pay the full loan amount, including any fees and finance charges, within two weeks or a month. For longer-term balloon payment loans, lenders must assess whether the borrower can afford the payments in the month with the highest total payments on the loan.
Additionally, the rule caps the number of short-term loans a lender can extend to a borrower to three in quick succession. Likewise, lenders cannot issue loans with flexible repayment plans if a borrower has outstanding short-term or balloon-payment loans.
Lenders can avoid the full-payment test on certain short-term loans up to $500. To qualify for this exemption, the lender may offer up to two extensions, but only if the borrower pays off at least one-third of the original principal each time. A lender may not offer these loans to a borrower with recent or outstanding short-term or balloon-payment loans. This option is not available for auto title loans.
Account Debit Limits
The new rule also restricts the number of times that a lender can access a borrower’s bank account. After two unsuccessful attempts, the lender may not debit the account again without reauthorization from the borrower.
The Bureau has excluded from the rule some loans that it claims pose less risk. It excludes lenders who make 2,500 or fewer short-term or balloon payment loans per year and derive no more than 10 percent of their revenues from such loans.
This new rule will take effect 21 months after it is published in the Federal Register.
Payday lenders should immediately begin putting into place revised compliance procedures regarding how they qualify borrowers. Otherwise, they could find themselves in violation of the rule.