On March 26, 2015, the Consumer Financial Protection Bureau (the Bureau or CFPB) announced several proposals to regulate short-term and longer-term consumer lending. As explained by Director Richard Cordray in announcing the proposals, the Bureau is concerned that some lending products may extend "credit to people in a way that sets them up to fail."
As part of this initiative, the Bureau is convening a Small Business Review Panel to gather feedback from small lenders. While the Bureau is far from a final rule, these preliminary proposals appear to fit within the Bureau's overall approach to lending and may provide insight into its plans for future proposed rules. A detailed outline of the preliminary proposals is available through the Bureau's website.
Why is the CFPB focused on short- and longer-term lending?
The CFPB has expressed concern that certain types of short- and longer-term loans result in deposit account fees and closures, vehicle repossession, and other financial difficulties for consumers. The Bureau's proposals highlight several practices that are often associated with short- and longer-term loans, including: insufficient underwriting, repeated renewals or refinancing of loans, holding a security interest in a vehicle as collateral, accessing a consumer's account for repayment, and performing multiple withdrawal attempts.
What types of short- and longer-term credit products are covered by the proposals?
The Bureau's proposals apply to short-term lending products like payday loans, deposit advance products, vehicle title loans, installment loans, and open-end lines of credit. For longer-term loans, the Bureau's proposals would cover vehicle title loans, installment loans, and open-end products of more than 45 days where the lender has access to repayment from the consumer's deposit account or paycheck, or holds a security interest in the consumer's vehicle, and the all-in annual percentage rate is more than 36%.
What are the substantive requirements of the proposals?
The Bureau has proposed two sets of regulations whereby lenders would be required to either engage in "preventative" measures at the outset of a lending relationship, or provide "protective" measures throughout the lending process.
In terms of the "preventative" option, lenders would need to verify a consumer's income and ability to repay before making a short- or longer-term loan. In addition to this analysis:
- For short-term loans, lenders would need to adhere to a 60-day cooling off period between loans unless the lender documented that the borrower's financial circumstances improved enough to repay a new loan without re-borrowing. Lenders would be held to a maximum of three short-term loans to a consumer in a 60-day period.
- For longer-term loans, lenders would need to determine a consumer's ability to repay each time the consumer seeks to refinance or re-borrow. A lender would be prohibited from refinancing into another loan with similar terms without documenting that the consumer's financial circumstances improved enough to be able to repay the loan.
Alternatively, the Bureau's "protective" option for short-term loans would require lenders to screen existing borrowers to confirm that the contractual duration of the loan would not result in the consumer being in debt on covered short-term loans with all lenders for more than 90 days in aggregate during a rolling 12-month period. The extension of loans would be capped at the three-loan maximum in a 60-day period; loan amounts would be restricted to $500; loans would be able to carry only one finance charge; and lenders would be unable require the consumer's vehicle as collateral. Longer-term loans would be restricted to a minimum duration of 45 days and a maximum duration of six months. Further, the Bureau is considering two additional "protective" options for longer-term loans:
- Approach 1 would require lenders to provide "generally the same protections offered under the National Credit Union Administration (NCUA) program" for "payday alternative loans." These loans have a 28% interest rate cap and an application fee of no more than $20.
- Approach 2 would require that the amount the consumer is required to repay each month could not exceed 5% of the consumer's gross monthly income, and the lender would be prohibited from making two of these loans within a 12-month period.
Finally, the proposal contains measures aimed at debt collection, including collection notification requirements and limits on unsuccessful attempts to make authorized payment withdrawals from consumer accounts.
What are the Bureau's next steps?
The Bureau is convening a Small Business Review Panel to review and provide feedback on the potential economic impacts of the proposals (see fact sheet here). In addition, the Bureau has posted a list of questions for small lenders participating in the Panel to determine the impact that the proposals would have on small lenders' businesses. The Bureau further requests information from small lenders regarding any specific additions or alternatives to the proposed requirements.
What other Bureau rulemakings impact short- and longer-term lending?
The Bureau's proposals are an example of its focus on holding financial institutions responsible under certain circumstances for confirming that individual consumers can afford the institution's products or services. Most recently, for example, the Bureau issued a proposed rule on prepaid products that applies Regulation Z's ability to pay and credit issuance rules to overdraft and credit features offered in connection with prepaid products.
The proposals are also consistent with the Bureau's pending rulemaking on debt collection. In November 2013, the Bureau issued an Advance Notice of Proposed Rulemaking that addressed a number of collection topics that would potentially impact short-term lenders – particularly as the Bureau has suggested that its authority under Dodd-Frank may extend to the collection practices of original creditors.
Have federal authorities brought enforcement actions against short- and longer-term lenders?
The CFPB and Federal Trade Commission (FTC) have brought numerous enforcement actions against short- and longer-term lenders and their service providers in recent years. In November 2013, the CFPB brought an enforcement action against Cash America International, Inc. for alleged violations involving the collection of debts and the making of loans in violation of the Military Lending Act. The next month, the CFPB sued CashCall, an online loan servicer, alleging unfair, deceptive, and abusive practices, including illegally debiting consumer checking accounts for loans that were void. In September 2014, the FTC shut down a payday loan operation that allegedly involved loans that consumers had never authorized.
What types of compliance programs does the CFPB expect for short- and longer-term lending?
Regardless of where the CFPB ends up with its proposals, lenders should review their current policies and procedures to confirm that they align with the Bureau's general expectations for compliance and regulatory risk management. Common best practices include:
- Implementing a compliance management system that covers the lender's business operations and sets management's expectations for compliance with applicable laws;
- Reviewing underwriting policies with an eye towards preventing potential consumer harm;
- Developing third-party oversight, management, and training to ensure that service providers comply with applicable Federal financial and consumer protection laws; and
- Setting up systems to monitor for, and respond to, consumer complaints and inquiries.
Where can I find additional information on CFPB and FTC approaches to short- and longer-term lending?
Lenders interested in learning more about the CFPB's approach to lending should start by reviewing the guidance that the CFPB has issued on lending, including a number of compliance bulletins, quarterly supervisory highlights, and the CFPB's examination manual (which includes a chapter on short-term lending). The FTC maintains a website dedicated to informing consumers about payday loans and other short-term lending products.
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For more information, please contact Venable's CFPB Task Force.