On October 5, 2017, the CFPB released its anticipated 1690-page Rule regarding payday, auto title, and balloon-payment loans.  The Rule, while pared down from the June 2016 CFPB’s proposed rule, still covers the ability-to-repay and underwriting requirements, payment restrictions and requirement, and new information reporting for covered loans.  (A version of the Rule, with Official Interpretations incorporated is available here.)

The rule is effective 21 months after publication in the Federal Register, with the exception of 60 days after publication for the registration of information systems.

Covered Loans

Covered loans included in the Rule are closed- or open-end loans that are extended to a consumer primarily for personal, family, or household purposes, and includes:

• Short-term loans with terms of 45 days or less,
• Longer-term balloon-payment loans, and
• Longer-term loans with both a cost of credit exceeding 36 percent and a leveraged payment mechanism.

Balloon-Payments are payments that are more than twice as large as other payments.

Leveraged payment mechanisms give the lender the right to initiate a transfer from the consumer’s account.  These include any type of “pull” mechanism, such as checks, EFT authorizations, remotely created checks or remotely created payment orders, in-house transfers.  Leveraged payment mechanisms do not include “push” transactions which are initiated by the consumer, such as a single immediate payment at the consumer’s request, or transfers not initiated by the lender.

Specifically excluded from the Rule are:

Alternative loans are loans that substantially follow NCUA’s conditions for Payday Alternative Loans, which requirements include:

• closed-end,
• length between one-month and six-months,
• principal between $200 and $1,000,
• repayable in substantially equal amounts and intervals in two or more payments and completely amortizes during the term of the loan,
• no other charges besides rates and fees with an application fee reflecting the actual costs associated and must not exceed $20,
• no more than three outstanding loans within 180 days, and no more than one outstanding loan at a time, with the lender, and
• proof of recurring income.

Accommodation loans exist when the lender has made 2,500 or less covered loans in the current year, and 2,500 or less covered loans in the previous year, and derived no more than 10 percent total income from covered loans during the previous tax year.

Underwriting and the Ability to Repay

The Rule requires lenders to make an upfront determination of a consumer’s ability to repay the loan, which the CFPB calls the Full-Payment Test.

For covered short-term loans (other than short-term conditional exemption loans), lenders will need to make a reasonable determination that consumers will have the ability to repay the loan as agreed, meet major financial obligations, and meet living expenses for 45 days after consummation, and for 30 days after the highest covered loan payment.

For covered longer-term balloon-payment loans, lenders will need to make a reasonable determination that consumers will have the ability to make all payments under the loan as agreed, meet major financial obligations, and meet basic living expenses during the repayment period, and for 30 days after making the highest covered loan payment.

In order to make a reasonable determination, the lender must obtain an application from the consumer that includes the amount of the consumer’s net income and the amount of payments required for major financial obligations.  The lender must also obtain verification of income and the payment amounts for major financial obligations.  Verification can be obtained from copies of paystubs and consumer credit reports, among other sources.  Lenders can use residual income or debt-to-income calculations in determining the ability to repay.

Longer-term (non-balloon) loans with both a cost of credit exceeding 36 percent and a leveraged payment mechanism are not currently subject to the ability to repay determination requirements.

Limitations

Cooling-off period:  The lender cannot make a covered short-term loan or covered longer-term balloon-payment loan, if consumer has an outstanding covered loan and for 30 days thereafter, if the new covered loan would be the fourth loan in a sequence of covered-short term, covered-long term balloon-payment, or combination of covered loans.

Short-Term Conditional Exemption

As an option to the Full-Payment Test, lenders can do a Principal-Payoff Option.  These covered loans do not require the determination of the consumer’s ability to replay, but include additional restrictions:

• No vehicle security
• Not open-end credit
• The first loan in the series is no more than $500.
• The second loan in the series is no more than 2/3 the principal amount of the first.
• The third loan in the series is no more than 1/3 the principal amount of the first.

The lender must also determine that

• In the last 30 days, the consumer has not had a covered short-term loan or a covered longer-term balloon payment loan (other than a short-term conditional exemption loan),
• The loan would not result in a sequence of more than three covered short-term loans under this exemption, and
• During a consecutive 12-month period, the borrower has not had more than six covered short-term loans or covered short-term loans outstanding for an aggregate period of 90 days or more.

If a lender makes a conditional exemption loan, it can not make a subsequent covered loan (except for the next in the series) or a non-covered loan to the consumer while the loan is outstanding and for 30 days thereafter.  This prohibition includes other types of loans, including purchase finance loans.

Payments

Lenders cannot initiate a payment transfers after two consecutive failed attempts unless the lender obtains additional signed authorization from the consumer.

Disclosures

The Rule requires lenders to provide specific disclosures throughout the loan’s life cycle.  Included in the Rule are Model Notices, which allows a safe-harbor for lenders.  Included in the disclosures are:

Short-Term Conditional Exemption Notices:

• Before making the first in a series of short-term conditional exemption loans, the lender must provide a Notice of Restrictions on Future Loans.
• Before making the third loan in a sequence of short-term conditional exemption loans, the lender must provide a Notice of Borrowing Limits on this Loan and Future Loans.

Payment Transfer Attempts Notices:

• Prior to initiating the first payment withdrawal, a lender must provide a First Payment Withdrawal Notice.
• Prior to initiating an unusual withdrawal, a lender must provide an Unusual Withdrawal Notice.

Included in the pool of unusual withdrawals are different amounts, dates other than the regularly scheduled payment dates, different payment channels than the prior payment, and re-initiate a returned payment.

• After a lender attempts two consecutive failed payment transfers, it must provide a Consumer Rights Notice.

Reporting Requirements

Lenders will need to report information regarding covered loans to information systems established to maintain information regarding consumer’s use of these loans.  Lenders will be required to report:

At consummation, or as close in time as feasible to consummation, lenders will need to report:

• Information to uniquely identify the loan,
• Information to identify the specific consumer(s) responsible for the loan,
• Whether the loan is a covered short-term loan or a covered longer-term balloon-payment loan,
• Whether the loan is made under the ability to repay determination, or the short-term conditional exemption,
• For loans under the short-term conditional exemption:
  • The fact that it is closed-end,
  • The date that each payment is due, and
  • The amount due on each payment.
• For open-end loans:
  • The fact that it is open-end,
  • The credit limit,
  • The date each payment is due, and
  • The minimum amount due on each payment.

While a covered loan is outstanding, lenders must report any updated information that was reported at consummation, within a reasonable period.

At the time the loan is no longer outstanding, or as close in time as feasible to closing, lenders must report:

• The date the loan ceases to be an outstanding loan, and
• Whether all amounts owed in connection with the loan were paid in full.

Compliance Program and Retention

Lenders will need to have and follow written policies that are designed to comply with the requirements of the Rule.

Lenders will also need to retain evidence of compliance for 36 months after a loan is paid off.  This includes:

For covered short-term or covered longer-term balloon-payment loans –

• Consumer reports,
• Verification of income and obligations,
• Consumer’s application, and
• In tabular format:
  • Lender’s net income projection
  • Lender’s major financial obligations projection
  • Lender’s calculated residual income or debt-to-income ratio
  • Estimated basic living expenses, and
  • Other consumer-specific information used in determining the ability-to-repay,
  • Information necessary to uniquely iden5tify the loan,
  • Information to identify the consumer(s) responsible for the loan,
  • Whether the loan is a covered short-term loan or a covered longer-term balloon payment loan,
  • Whether the loan was made under the ability to repay qualifications, or under the short-term conditional exemption,
  • The consummation date,
  • For short-term conditional exemptions; the principal amount borrowed,
  • For closed-end covered loans
    • The fact that it is closed-end,
    • The date each payment is due,
    • The amount due on each payment date
  • For open-end covered loans
    • The fact that it is open-end,
    • The credit limit on the loan,
    • The date each payment is due,
    • The minimum amount of each payment
  • Whether the lender obtained vehicle security from the consumer,
  • The loan number in a loan sequence of covered short-term loans, covered longer-term balloon-payment loans, or a combination thereof,
  • For any full payment on the loan that was not received or transferred by the contractual due date, the number of days the payment was past due, up to 180,
  • For loans with vehicle security; whether repossession of the vehicle was initiated,
  • Date of the last or final payment received,
  • The date the loan ceased to be outstanding,
  • Whether all amounts owned were paid in full,
  • Any leveraged payment mechanism(s) obtained by the lender
  • Authorization of additional payment transfer,
  • Underlying one-time electronic transfer authorization or underlying signature check,
  • History of payments received and attempted payment transfers, including:
    • Date of payment receipt or attempted payment transfer,
    • Amount of payment due,
    • Amount of attempted payment transfer,
    • Amount of payment received or transferred,
    • Payment channel used for attempted payment transfer
    • Whether the lender obtained authorization after two consecutive failed transfers.

Longer-term (non-balloon) loans with both a cost of credit exceeding 36 percent and a leveraged payment mechanism are not currently subject to the record keeping requirements.

Anti-Evasion

Official Interpretations to §1041.13 states that “a lender must not take any action with the intent of evading the requirements of part 1041. In determining whether a lender has taken action with the intent of evading the requirements of part 1041, the form, characterization, label, structure, or written documentation of the lender’s action shall not be dispositive. Rather, the actual substance of the lender’s action as well as other relevant facts and circumstances will determine whether the lender’s action was taken with the intent of evading the requirements of part 1041. If the lender’s action is taken solely for legitimate business purposes, it is not taken with the intent of evading the requirements of part 1041. By contrast, if a consideration of all relevant facts and circumstances reveals the presence of a purpose that is not a legitimate business purpose, the lender’s action may have been taken with the intent of evading the requirements of part 1041. A lender action that is taken with the intent of evading the requirements of part 1041 may be knowing or reckless. Fraud, deceit, or other unlawful or illegitimate activity may be one fact or circumstance that is relevant to the determination of whether a lender’s action was taken with the intent of evading the requirements of part 1041, but fraud, deceit, or other unlawful or illegitimate activity is not a prerequisite to such a finding.”