Is the Payday Lending Rule Going Away?
By Victoria E. Stephen, Deputy General Counsel
Back in October 5, 2017, the Consumer Financial Protection Bureau (CFPB) issued a Final Rule (Rule) aimed at ending so-called “payday debt traps” by requiring lenders to take certain steps to make sure consumers have the ability to repay their loans. The Rule primarily has two sets of requirements: (1) mandatory underwriting requirements prior to making these loans; and (2) requirements and limitations on a lender’s attempts to withdraw loan payments from a consumer’s deposit account.
The CFPB has now issued two notices of proposed rulemaking to (1) rescind the mandatory underwriting provisions of the Rule (Reconsideration NPRM), and (2) delay the August 19, 2019 compliance date to November 19, 2020 for the mandatory underwriting provisions (Compliance Date Delay NPRM) that it wants to rescind.
Just as there were when the Rule was first issued, there are two opposing camps on the new changes. Those opposed to the changes argue that consumers are losing much-needed financial protection in an especially vulnerable area; those in favor say that consumers will once again have more lending choices and perhaps at lower prices without banks having as much liability and compliance burden.
The first part of the Rule contains mandatory underwriting provisions that apply to what we traditionally think of payday and title loans. These rules deem it “an unfair and abusive practice” to make certain short-term and longer-term balloon-payment loans “without reasonably determining” that consumers will have the ability to repay the loans according to the terms set out in the agreement.
There are basically two ways to comply with this part. Under the first method, lenders making covered loans are required to, among other things, make a reasonable determination that the consumer would be able to repay the loan and be able to meet the consumer’s basic living expenses and other major financial obligations without needing to borrow money again over the next 30 days. For the second method, lenders are allowed to make certain short-term loans without having to meet all the underwriting criteria as long as the lender confirms that the loan has certain terms, that the consumer’s borrowing history meets certain conditions, and that the consumer gets certain disclosures.
The Rule also contains a set of provisions that apply to a much broader group of covered loans (not only those above, but also certain high-cost installment loans), with an emphasis on limiting a lender’s attempts to withdraw payments from a consumer’s checking account. Besides notice requirements, the main focus of this part of the rule deems it an unfair and abusive practice if a lender tries to withdraw a payment from a consumer’s account after two consecutive attempts have already failed, unless the consumer provides a new authorization to the lender to do so. There are no proposed changes to this part of the Rule.
So in short, the rule is not entirely going away—but either of these proposed rules succeeding will be welcome relief for banks. If desired, banks may submit written comments on the Reconsideration Proposed Rule until May 15, 2019.
Reconsideration Proposed Rule
Compliance Date Delay Proposed Rule
CFPB Small Entity Compliance Guide