To: AFSA Membership
From: Chris Stinebert
Re: CFPB Provides Early Look at Payday Loan Proposal
Date: March 26, 2015
Early this morning, the Consumer Financial Protection Bureau (CFPB) published an outline of proposals it is considering regarding payday loans in advance of convening a Small Business Review Panel to gather feedback from small lenders, which is the next required step in the rulemaking process. The CFPB is also hosting a field hearing on the subject today at 12:00 p.m. EDT.
Despite specifically mentioning certain high-cost installment loans, the proposals shared by the CFPB today focus on ability to repay, loans requiring repayment via a deposit account or paycheck, or the lender holding a security interest in the borrower’s vehicle. The proposals would cover short-term credit products that require consumers to pay back the loan in full within 45 days, as well as “high-cost, longer-term credit products of more than 45 days where the lender collects payments through access to the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and the all-in (including add-on charges) annual percentage rate is more than 36 percent.” This all-in rate could be analogous to the Military Annual Percentage Rate or MAPR.
The CFPB announcement specifically references installment loans. “Installment loans typically stretch longer than a two-week or one-month payday loan, have loan amounts ranging from a hundred dollars to several thousand dollars, and may impose very high interest rates. The principal, interest, and other finance charges on these loans are typically repaid in installments. Some have balloon payments. The proposal would also apply to high-cost open-end lines of credit with account access or a security interest in a vehicle.”
The proposals fall into two categories: one covering short-term loans and the other covering longer-term loans. Both categories include two sets of requirements that lenders could choose to follow, either prevention requirements or protection requirements. Under the prevention requirements, lenders would have to verify the consumer’s income, major financial obligations, and borrowing history to determine a consumer’s ability to repay the loan. For longer-term loans, fees for ancillary products must be included in the ability-to-repay calculation. Under the protection requirements, lenders would have to comply with certain restrictions intended to ensure that consumers can affordably repay their debt. Both categories would include restrictions on the number of loans consumers can receive in given time periods.
The proposal also includes restrictions on collection practices. The CFPB is considering requiring lenders to provide borrowers three business days’ notice before submitting a transaction to the consumer’s bank. In addition, a lender could not attempt a third withdrawal from a consumer’s deposit account if the two prior attempts were unsuccessful without obtaining a new authorization. Finally, the proposal caps short-term loan rollovers at two – three total – followed by a mandatory 60 day cooling off period. Refinances on longer term loans would be prohibited if the consumer is delinquent on previous loan obligations.
It appears that the CFPB was intending to cover title loan products in this area of their proposal; however, if a traditional installment lender holds a security interest in the borrower’s vehicle, it would be covered under the proposal. AFSA will seek clarification on this requirement as well as ensuring that the ACH portion of the proposal is only triggered if a lender requires access to a consumer’s deposit account rather than offering the service as a convenience to the consumer.
Although we are encouraged that the CFPB’s outline of various proposals under consideration does not focus on traditional installment loans, we remain diligent and concerned that the actual proposed rule may adversely impact our member’s business practices, and more importantly, consumers’ ability to access credit through the most affordable product available – traditional installment loans.
The proposals published today are the first step of a lengthy process and could change substantially. Next, the CFPB must convene a Small Business Review Panel. After the panel, the CFPB may formally propose rules, which must be subject to the public comment and review process. AFSA will be represented on the upcoming Small Business Review Panel, and will continue to work with the CFPB throughout the process. AFSA will continue to make the distinction between traditional installment loans and other small dollar products to the CFPB, policymakers, and the general public.
The field hearing will be streamed live via the CFPB blog starting at 12:00 p.m. EDT.
Relevant Links:
Fact Sheet on SBREFA panel process
For more information, please contact AFSA Executive Vice President Bill Himpler at 202-466-8616 or bhimpler@afsamail.org.
