On March 26, the CFPB announced that it is considering proposing a rule to “end payday debt traps” and released several related documents, including a fact sheet and an outline of the proposal that will be presented to a panel of small businesses pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA). The proposal sets forth ability to repay requirements for “short-term” and “longer-term” loans, and then provides alternative options for lenders to provide both types of loans in lieu of complying with the general ability to repay requirements.
Under the SBREFA process, the CFPB first seeks input from a panel of small businesses that likely will be subject to the forthcoming rule. A report regarding the input of those reviewers is then created and considered by the CFPB before issuing its proposed rule.
Scope of Products Covered
The SBREFA outline suggests that the proposal would cover two categories of loans:
The CFPB specifically stated that it is considering a broader definition of APR than TILA’s definition and that this may include fees and ancillary products, suggesting that it may use the military annual percentage rate defined in 32 C.F.R. Part 232 as a measure of this “all-in” APR.
Ability to Repay Requirements for Covered Short-Term Loans
The proposal would impose different requirements on “covered short-term loans” and “covered longer-term loans.” For short-term products, lenders would be required to evaluate the consumer’s ability to repay the loan by the due date. As part of this, lenders would be required to obtain and verify information about the consumer’s income, “major financial obligations” (such as housing payments, other debt obligations, child support, and possibly utility payments and medical expenses), and the consumer’s borrowing history with respect to other covered short-term loans. The lender would need to obtain documentation of the consumer’s income, verify major financial obligations using third-party records, and determine the consumer’s borrowing history with respect to covered short-term loans by checking its own records (and the records of any affiliate) and by checking a commercially available reporting system. Based on the verified information, the lender then would be required to determine that the consumer could repay the loan after meeting his or her major financial obligations and necessary living expenses.
Furthermore, for refinances of covered short-term loans, the proposal would create a rebuttable presumption that the consumer is unable to repay the new extension of credit if the new extension of credit has a “similar” payment structure. To rebut this presumption, the lender would need evidence of a change in the consumer’s circumstances indicating the ability to repay (e.g., evidence of a pay raise) and would need to comply with the verification and ability to repay requirements for an initial loan. The presumption also would cover any new loan made within 60 days of a prior covered short-term loan. After the third loan in a sequence, the presumption regarding the consumer’s inability to repay would be conclusive. Self-certification of a change in circumstances would not be permitted.
Alternative Requirements for Covered Short-Term Loans
The CFPB’s proposal also contains “alternative” requirements. A lender could extend a covered short-term loan without complying with the ability to repay requirements described above if the lender complied with certain screening requirements and structural limitations. The screening requirements are:
Furthermore, the following structural limitations would apply:
With respect to the “taper off” requirement, the CFPB is considering two options:
Ability to Repay Requirements for Covered Longer-Term Loans
The proposal would impose ability to repay and underwriting verification requirements for covered longer-term loans that are similar to the requirements for short-term covered loans with certain exceptions. Specifically, in connection with refinances and new loans within 60 days of a prior covered loan, different rules apply depending on the prior covered loan. If the prior covered loan was a covered longer-term loan without a balloon payment, then no presumption of the consumer’s inability to repay applies unless:
In those cases, the lender would need to obtain evidence of a change in circumstances, similar to a covered short-term loan.
If the prior covered loan was a covered longer-term loan with a balloon payment (defined as a payment more than two times the regular payment) or a covered short-term loan (or either if there are multiple covered loans in the prior 60 days), then the same presumptions of the consumer’s inability to repay discussed above in connection with covered short-term loans also would apply.
Alternative Requirements for Covered Longer-Term Loans
Similar to covered short-term loans, the CFPB’s proposal also contains “alternative” requirements for covered longer-term loans that would substitute for compliance with the ability to repay requirements described above. The CFPB is considering two alternatives: (i) loans made pursuant to the NCUA’s Payday Alternative Loan Program, and (ii) loans with periodic payments below a specified payment-to-income ratio. The former would involve the following screening requirements and structural protections:
The CFPB further stated that it is considering the following additional requirements:
Some additional protections also would apply if the lender holds a deposit account in the consumer’s name.
Alternatively, the CFPB is considering allowing lenders to offer covered longer-term loans without complying with the ability-to-repay requirements described above if the loan meets the following requirements:
The CFPB also noted that it is considering a requirement to provide disclosures to consumers explaining the requirements for covered longer-term loans.
Restricted Collection Practices
For both short-term and longer-term covered loans, the CFPB’s proposal also contains two restrictions on collection practices. First, the proposal requires the lender to provide written notice before each lender-initiated attempt to collect payment from a consumer’s checking, savings, or prepaid account. This notice must contain the following information and must be provided at least three (3) business days in advance of each payment collection attempt and no more than seven (7) business days before payment is due:
Finally, the proposal limits the number of times a lender may attempt to collect payment on a covered loan from a consumer’s account, including a checking, savings, or prepaid account. After two consecutive failed attempts to collect payment, a lender would be prohibited from using any authorization it has at the time to make additional payment attempts on the loan. This restriction would apply to both delinquent payments and payments that are due in the future. However, the lender could obtain a new authorization from the consumer after hitting this cap and use the subsequently-granted authorization to collect future payments. The CFPB noted that it is considering whether to propose additional requirements to ensure that any new authorization was obtained freely, such as a disclosure indicating that the prior payment attempts have failed and that, if the consumer provides a new authorization, the consumer may incur further NSF and other fees in the event that future payment attempts fail.
Questions regarding the matters discussed may be directed to the lawyers listed in this alert, or to any other Orrick attorney with whom you have consulted in the past.