CPFB payday loan rule

CPFB payday loan rule

The future of wide-ranging legislation designed to curb the payday lending industry is up in the air following President-elect Donald Trump’s shock US election win and a resurgent Republican Party.
However, at least for now, the Consumer Financial Protection Bureau (CFPB) proposed payday lending rule is still on the table.

Initially proposed on June 2, the draft of the proposed rule in its current form is broadly preemptive of the existing consumer lending laws across 36 states. As well as payday loans, the proposed rule also covers title loans and certain types of installment loans. It also sets out a detailed and specific list of restrictions of loan frequency and requirements for checking borrower suitability.

The draft legislation’s main focus is to prevent extended periods of indebtedness for covered loans. The CFPB takes the position that borrowers of payday loans often renew or roll over their loans more than once due to the fact lenders tend not to underwrite the loans based on the borrower’s ability to repay and set terms that require repayment within a single pay cycle.

What would the rule mean for lenders?

The proposed rule will give lenders two options when it comes to granting short-term loans:

  • In the first, they must confirm the borrower can fully repay the loan on time and still cover their basic living expenses and any other large-scale financial obligations.
  • The second option proposes capping the loan amount at $500 and limiting the borrower to two rollovers with compulsory one-third of the principal paid-off at each rollover. What’s more, this option can be made available only to borrowers without outstanding short-term covered loans and have not had debt on a short-term loan exceeding 90 days in the preceding 12 months.

This highly restrictive CFPB rule will, if and/or when it is implemented, imposes a Federal-level control on the varied and complex financial regulatory regimes in place across 36 states, most of the existing legislation is state-specific and was developed over decades of consumer lending industry supervision. Almost all online lenders now provide longer-term installment loans to consumers. Only store front lenders still offer primarily payday loans. Therefore this regulation will mostly affect storefront lenders. Large chains of storefront lenders believe a third of their stores will close if this rule takes effect, resulting in the loss of hundreds of thousands of jobs. It is worth noting there are more payday stores in the US than there are McDonald’s outlets.

Most lenders already have strict underwriting rules that are, at times, stricter than the loan affordability rules that CFPB is proposing. Lenders believe a third of consumers who previously able to get a loan will not be able to under the new rules. This is the case for both online and storefront lenders but mostly storefront. While the existing state laws offering greater protection to consumers than the CFPB rule will remain in place, the CFPB rule effectively changes the way the payday loans industry operates. This also potentially means the regulations for payday lending at a state level are unlikely to survive post-implementation of the rule.

Opposition to the rule looks likely to build

The uncertainty surrounding the rule generated the most feedback to the Obama administration created agency in its five-year history. Its implications have led to additional legislation being drafted to counter it. The Financial Services and General Government Appropriations bill has been amended in the wake of the CFPB rule being drafted that would block the agency from regulating payday lending until it tables a detailed report before Congress on the impact on consumers and that identifies credit products available to replace the current sources of short-term credit. Another bill, put forward by Colorado Congressman Scott Tipton, the Accounting for Consumer Credit and Encouraging State Solutions (ACCESS) Act3 would allow any states or sovereign tribes to request an exemption from the CFPB rule. Tribal lenders believe that CFPB rules don't apply to them because the Dodd-Frank Act of 2010 that created the CFPB did not specifically include tribal nations. Of all US online lenders, about half are tribal.

Currently the bill remains with the House Financial Services Committee but could be championed by the resurgence of the Republican Party and their efforts to dilute the powers of the CFPB. President-elect Trump has already stated that when he gets into office he will sign an executive action order that requires the elimination of two regulations for every new regulation.

The proposed CFPB rule would replace state regulatory regimes across the board and change the face of the payday consumer lending market. However, in light of the US election results the CFPB is likely to be reevaluating its control and regulatory agenda in a political environment that is less favorable to large-scale regulation at a federal level like that of the payday loan rulemaking.