The CFPB released its Proposed Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule on June 2, in coordination with a field hearing on these small-dollar loans.  The 1333 page proposal aims to end payday debt traps, where borrowers seeking a short-term cash fix are saddled with loans they cannot afford and sink into long-term debt.

Because of the scope of the proposed rule, our summary will be presented in three parts:  (1) overview, payments, reporting, compliance program and record retention, and evasion; (2) short-term loan requirements; and (3) long-term loan requirements.  If you just can’t wait for parts 2 and 3, the Proposed Rule is available here.  We have pulled out the actual proposed Part 1041 (Regulation OO?) and incorporated the Official Interpretations into a 45 page, 8 point font, document available here.

The CFPB is accepting comments on the Proposed Rule until September 14, 2016.

Part 1

Overview

Essentially, the Proposed Rule will require the credit union to presume that the consumer does not have the ability to repay a covered loan, and then prove that they do before making a covered loan.  The Proposal identifies that making covered loans without reasonably determining that the consumer will have the ability to repay the loan are abusive and unfair practices.

The Proposal provides two categories of covered loans.  A “covered loan” means closed-end or open-end credit that is extended to a consumer primarily for personal, family, or household purposes that is not excluded by the rule.  Specifically, covered loans are:

• Short-term loans of 45 days or less, including payday loans, deposit advance products, vehicle title loans, installment loans, and open-end lines of credit; and
• Longer-term loans greater than 45 days that have an all-in APR greater than 36% (total cost of credit) and either are repaid directly from the consumers account (leveraged payment method) or direct access to the consumer’s paycheck, or are secured by the consumer’s vehicle.

Covered loans do not include:  credit extended for the sole and express purpose of financing a consumer’s initial purchase of a good when the credit is secured by the property being purchased, whether or not the security interest is perfected or recorded; real estate secured credit; credit cards; student loans; non-recourse pawn loans; and overdraft services and lines of credit.

The total cost of credit includes the total amount of charges associated with the loan.  This includes:

• Any charge in connection with credit insurance;
• Any charge for a credit-related ancillary product, service, or membership;
• Finance charges;
• Application fee; and
• Participation fee.

A leveraged payment mechanism is:

• The right to initiate a transfer of money, through any means, from a consumer’s account to satisfy an obligation on a loan, except that the lender or service provider does not obtain a leveraged payment mechanism by initiating a one-time electronic fund transfer immediately after the consumer authorizes the transfer;
• The contractual right to obtain payment directly from the consumer’s employer or other source of income; or
• The ability to require the consumer to repay the loan through a payroll deduction or deduction from another source of income.

Payments

The proposed rule makes it an unfair and abusive act to attempt to withdraw payment from a consumer’s account without first providing notice at least three, but not more than six, business days in advance of a withdrawal attempt.  If two consecutive payment attempts have failed, the lender cannot attempt to withdrawal another payment unless the consumer provides a new authorization.

Reporting

Lenders would have to use a CFPB-registered information system to report and obtain credit history regarding covered loans.  The registered information systems (think credit bureaus) will be established after the final rule is released.  Lenders will have to report at consummation, while outstanding, and at termination for most covered loans.  Reporting will include the type, amount, required payment(s) and due date(s), and when the loan is paid in full.

Compliance Program and Record Retention

Lenders will need to develop and follow written policies and procedures that are reasonably designed to ensure compliance with the requirements for the Proposed Rule.

Along with the loan agreements, lenders will need to retain information regarding covered loans, in a tabular format, information regarding how the lender determined the ability to repay, history of the loan, and payment transfer authorizations.  Lenders will need to retain the required information for 36 months after the end of the loan.

Evasion

Lenders cannot be creative in developing processes or products that are aimed to evade the Proposed Rules requirements such as obtaining a leveraged payment mechanism after consummation.