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.  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 3

Longer-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 longer-term loan, unless it first makes a reasonable determination that the consumer will have the ability to repay the loan according to its terms.  For a covered longer-term loan that is a line of credit, a lender must not permit a consumer to obtain an advance under the line of credit more than 180 days after the date of a required determination, unless the lender first makes a new determination that the consumer will have the ability to repay the covered 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 term of the loan, and for a covered longer-term balloon-payment 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.

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.

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 longer-term loans include:

A presumption of unaffordability exists 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 with the financial institution,  (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.

An exception to the presumption of unaffordability exists when the size of every payment on the new covered longer-term loan would be substantially smaller than the size of every payment on the outstanding loan, or the new covered longer-term loan would result in a substantial reduction in the total cost of credit relative to the outstanding loan.

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 longer-term loan during the time period in which the consumer has a covered short-term or a covered balloon-payment loan, made by the lender or its affiliate, outstanding and for 30 days thereafter.

Conditional exemptions for certain covered longer-term loans of up to six months’ duration

The current Payday Alternative Loans (PAL) structured loans will still be allowed, as long as they satisfy the following:

• Not structured as open-end credit,
• The loan term is not more than six months,
• The principle amount is between $200 and $1,000,
• There are at least two required payments, due at least monthly, with all payments substantially equal in amount and timing, and
• Amortizes completely during the term.

Lenders will need to ensure the consumer has not had more than three of this type of covered-loan in the last 180 days issued by the lender or its affiliates.  The lender will also need to comply with documenting proof of continuing income and cannot impose a prepayment penalty or exercise a right of set-off to collect on the loan, including placing a hold on funds in the consumer’s account.

Conditional exemptions for certain covered longer-term loans of up to 24 months’ duration

Exemptions apply for loans that:

• Are not structured as open-end credit,
• The loan terms is not more than 24 months,
• There are at least two required payments, due at least monthly, with all payments substantially equal in amount and timing,
• Amortizes completely during the term, and
• The interest rate is less than or equal to 35% based on the modified cost of credit (total cost of credit – a single origination fee that is based on actual cost or under the safe harbor amount of $50).

Lenders will need to ensure the consumer has not had more than two of this type of covered-loan in the last 180 days issued by the lender or its affiliates.  The lender will also need to comply with documenting proof of continuing income and cannot impose a prepayment penalty or exercise a right of set-off to collect on the loan, including placing a hold on funds in the consumer’s account.

The lender, at least every 12 months, must calculate the default rate for covered-longer term loans and if the rate is above five percent, refund any origination fees imposed in connection with the covered loans.