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) longer-term loan requirements.  If you just can’t wait for parts 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.

Part 2

Short-Term Loans

It is an abusive and unfair practice for a lender to make a covered short-term loan without reasonably determining that the consumer will have the ability to repay the loan.

The lender must not make, or increase the credit available on, a covered short-term loan, unless it first makes a reasonable determination that the consumer will have the ability to repay the loan according to its terms.

Determination of a consumer’s ability to repay is only reasonable if, the lender concludes that:

• The consumer’s residual income will be sufficient for the consumer to make all payments under the loan and to meet basic living expenses during the shorter of the term of the loan or the period ending 45 days after consummation of the loan;
• The consumer will be able to make payments required for major financial obligations as they fall due, to make any remaining payments under the loan, and to meet basic living expenses for 30 days after having made the highest payment under the loan on its due date; and
• For loans with a presumption of unaffordability, the applicable exception requirements are met.

Basic living expenses means expenditures, other than payments for major financial obligations, that a consumer makes for goods and services necessary to maintain the consumer’s health, welfare, and ability to produce income, and the health and welfare of members of the consumer’s household who are financially dependent on the consumer.

Major financial obligations means a consumer’s housing expense, minimum payments and any delinquent amounts due under debt obligations (including outstanding covered loans), and court-or government agency-ordered child support obligations.

A consumer is presumed not to have the ability to repay (presumption of unaffordability) a covered short term loan during the time period in which the consumer has an existing covered loan and for 30 days thereafter.  An exception applies when either the consumer has paid off the existing covered loan and the new loan is 50% or less than the paid loan, or the new loan is to pay off the existing loan with no additional cash.

To make the required reasonable determination, the lender must obtain the consumer’s written statement, obtain verification evidence, and make a reasonable projection of the amount and timing of a consumer’s net income and payments for major financial obligations.

A consumer’s written statement includes a statement the consumer writes on a paper application or enters into an electronic record, or an oral consumer statement that the lender records and retains or memorializes in writing and retains.

A lender must obtain verification evidence for the amounts and timing of the consumer’s net income and payments for major financial obligations, as follows:

• For the consumer’s net income, a reliable record (or records) of an income payment (or payments) covering sufficient history to support the lender’s projection (this includes paystub copies, depository account transaction records, and pay history printouts from an employer, among others).
• For the consumer’s required payments under debt obligations, a national consumer report, the records of the lender and its affiliates, and a consumer report obtained from a national payday loan tracking system (to be developed).
• For a consumer’s required payments under court-or government agency-ordered child support obligations, a national consumer report
• For a consumer’s housing expense (if not shown on a credit report), transaction records showing payments or an estimate based on the housing expenses of other consumers in the area.

Additional limitations for covered short-term loans include:

• The lender cannot make a covered short-term loan during the time period in which the consumer has an existing covered short-term loan and for 30 days thereafter, unless the presumption of unaffordability exception (above) applies.
• The lender cannot make a covered short-term loan during the time period in which the consumer has a covered longer-term balloon-payment loan outstanding and for 30 days thereafter unless the lender determines that there is sufficient improvement in the consumer’s financial capacity such that the consumer would have the ability to repay the new loan according to its terms despite the unaffordability of the prior loan.
• The lender cannot make a covered short-term loan if: (1) The consumer is or has been delinquent by more than seven days within the past 30 days on a scheduled payment on the outstanding loan,  (2) The consumer expresses or has expressed within the past 30 days an inability to make one or more payments on the outstanding loan, (3) The period of time between consummation of the new covered short-term loan and the first scheduled payment on that loan would be longer than the period of time between consummation of the new covered short-term loan and the next regularly scheduled payment on the outstanding loan, or (4) The new covered short-term loan would result in the consumer receiving no disbursement of loan proceeds or an amount of funds as disbursement of the loan proceeds that would not substantially exceed the amount of the payment or payments that would be due on the outstanding loan within 30 days of consummation of the new covered short-term loan, unless the lender determines that there is sufficient improvement in the consumer’s financial capacity such that the consumer will have the ability to repay the new loan according to its terms despite the unaffordability of the prior loan.
• The lender cannot not make a covered short-term loan during the time period in which the consumer has a covered short-term loan outstanding and for 30 days thereafter if the new covered short-term loan would be the fourth loan in a sequence of covered short-term loans.

An exception for the ability to repay is one closed-end, $500 or less, amortized for 45 days or less.  The lender still must verify that the consumer does not have any outstanding covered loans, have had any covered loans in the last 30 days, would not result in the consumer have a loan sequence of more than three exception loans, and during the previous 12 months have more than six covered loans outstanding or covered loans outstanding for an aggregate period of more than 90 days.  Specific notice disclosures are required for these exception loans.

Next:  Part 3 – Longer-Term Loans

Proposed Payday Loan Rule – Part 1 – NW Compliance Group