Last month, the CFPB issued its final rule on payday, vehicle title, and certain high-cost installment loans (the Rule) but it remains to be seen whether it will ever become effective. Except for one requirement, discussed below, the Rule is effective 21 months from t he date of publication in the Federal Register, which as of November 7, has not yet happened. This is up from the 15-month implementation the CFPB had in the proposed rule. With the successful overturning of the Arbitration Rule, Republicans in Congress may try to override the Rule. Failing that, the financial services industry will likely litigate to stop the Rule. Richard Cordray, the current Director of the CFPB, is expected to resign soon to run for Governor of Ohio. Even if he does not, his term is set to expire in July 2018. Surely, the new Director President Trump will appoint will not be as eager to defend the Rule in court. That said, until the Rule is overturned, we should start planning its implementation. With that in mind, let's see what the Rule requires.
The Rule applies to any lender who regularly extends credit to consumers primarily for personal, family, or household purposes. The Rule applies generally to three main types of loans:
- Covered short-term loans: Covered loans with a term of 45 days or less. A closed-end loan, is a covered short-term loan if the consumer is required to repay substantially the entire amount of the loan within 45 days of consummation. An open-end loan is a covered short-term loan if the consumer is required to repay substantially the entire amount of any advance within 45 days of the advance.
- Covered longer-term balloon-payment loans: A loan (either closed or open-end) is a covered longer-term balloon-payment loans if the consumer is required to repay substantially the entire balance or substantially the entire amount of a single advance more than 45 days after consummation in either a single payment or through at least one payment that is more than twice as large as any other payment. If a loan is structured as a loan with multiple advances where paying the required minimum payments may not fully amortize the outstanding balance by a specified date or time and the amount of the final payment to repay the outstanding balance at such time could be more than twice the amount of other minimum payments under the plan, it is also a covered longer-term balloon-payment loan.
- Covered longer-term loans: A covered longer-term loan is any loan with a cost of credit greater that 36% APR and a form of leveraged payment mechanism that gives the lender a right to initiate transfers from the consumer's account without further action by the consumer. Covered longer-term loans are subject only to the Rule's requirements concerning payment withdrawal practices, related disclosures, and recordkeeping.
As with any regulation, there are exceptions. The following types of loans are exempt from the Rule: (i) loans extended solely to finance the purchase of an automobile or other consumer good in which the automobile or other good secures the loan; (ii) home mortgages and other loans secured by real property or a dwelling if recorded or perfected within the term of the loan; (iii) credit cards; (iv) student loans; (v) non-recourse pawn loans; (vi) overdraft services and overdraft lines of credit; (vii) wage advance programs; and (viii) no-cost advances. In addition to the above exceptions, the Rule provides two conditional exceptions: alternative loans and accommodation loans.
An alternative loan is essentially the same as a Payday Alternative Loan (PAL) under the NCUA's rules except they may be offered by any lender. Credit unions may be familiar with these, but other lenders likely are not. An alternative loan is a loan that (i) is closed-end; (ii) has a term between one to six months; (iii) has a loan amount between $200 and $1,000; (iv) is payable in two or more amortizing payments without a balloon payment; and (v) that impose any charges other than the rate and application fees permissible under the NCUA's PAL program. Prior to extending the loan, the lender must ensure that the consumer does not currently have an outstanding alternative loan with the lender and the consumer has not been indebted on more than three alternative loans in the previous 180 days. The lender must also implement and maintain policies and procedures for documenting the consumer's recurring income.
An accommodation loan is any covered loan (covered short-term loans, covered longer-term balloon-payment loans, or covered longer-term loans) made by a lender who, with its affiliates, has made 2,500 or fewer covered loans in the current and previous calendar years and for which covered loans made up no more than 10% of its receipts in the most recent tax year. If a lender was not in operation the previous tax year, the lender may make accommodation loans if it reasonably anticipates that such loans will not make up 10% or more of its receipts during the current tax year. If a lender has not made more than 2,500 covered loans in the previous year and covered loans do not account for more than 10% of its receipts, a lender may make up to 2,500 covered loans without complying with the Rule. But once it exceeds 2,500 loans or it exceeds the 10% threshold, it must immediately begin complying with the Rule.
Now that we know which loans are covered and which are excluded, let's look at what the Rule requires. For all covered short-term and longer-term balloon payment loans, before making the loan or advance on the loan, a lender must reasonably determine that the consumer will be able to make the paymentson the loan while also meeting major financial obligationsand basic living expenseswithout needing to re-borrow over the next 30 days. Additionally, for open-end lines of credit, the lender must make this determination for each advance more than 90 days after the lender's last determination. For lines of credit, the lender must make the determination on the assumption that the consumer will utilize the full amount of credit extended and pay only the minimum payment each payment cycle. When making the determination, major financial obligations include the consumer's housing expense, minimum payments under debt obligations, including outstanding covered loans, child support obligations, and alimony obligations. Basic living expenses include expenditures, other than payments for major financial obligations, that a consumer makes for goods and services that are necessary to maintain the consumer's health, welfare, and ability to produce income, and the health and welfare of the consumer's dependents.
The Rule imposes two requirements regarding a lender's withdrawal of payments from a consumer's transaction account after two consecutive attempts have failed due to insufficient funds. This requirement applies to all covered loans, including covered longer-term loans. In such cases, the lender may not attempt another withdrawal from the same account until the lender obtains a new and specific authorization to make further withdrawals from the consumer's account. This prohibition on further withdrawal attempts applies regardless of the means through which the lender initiates the transfer, including EFTs, checks, ACHs, etc. Additionally, the lender is required to provide a written notice before its first attempt to withdraw payment for a covered loan from a consumer's account and before subsequent attempts that deviate from scheduled amounts or dates or involve a different payment channel than the prior attempt.
The Rule generally requires lenders who make covered loans to furnish certain loan data to information systems that are registered with the CFPB and to pull a consumer report from one registered information system prior to making a covered short-term or longer-term balloon-payment loan. Lenders are required to report certain information to all registered information systems at origination, to update the information if it changes over time, and to report certain information when the loan ceases to be outstanding. The Rule provides, effective 60 days after the publication of the Rule in the Federal Register, that the CFPB may provisionally register information systems that meet its eligibility requirements.
Finally, the Rule requires lenders to develop and follow policies and procedures designed to ensure compliance with the Rule. Lenders must also retain evidence of compliance for 36 months.
With any luck, the Rule will not ever become effective. But because its requirements are so detailed, you need to start thinking about this Rule now. I recommend that you review whether you make 2,500 or more covered loans. If you do, you should begin your implementation efforts immediately. If, however, you make fewer than 2,500 covered loans and they make up less than 10% of your receipts, you should implement procedures to track and forecast your covered loans and receipts. When you are projected to cross either threshold, or even get close, you must immediately begin your implementation efforts in earnest as there is no grace period.