Monday, April 6, 2015

A Look at the CFPB Payday Proposal: Part 2 (Longer-Term Loans)

In yesterday’s post, we began our examination of the CFPB Payday Proposal focusing on short-term loans or those where the term of the loan is 45 days or less.  The CFPB’s proposal also encompasses “longer-term” credit products.  Specifically, the CFPB proposal intends to regulate loans with a duration of more than 45 days that have an all-in APR in excess of 36% (including add-on charges) where the lender can collect payments through access to the consumer’s paycheck or bank account or where the lender holds a non-purchase money security interest in the consumer’s vehicle.  Like short term loans, the CFPB is offering two alternatives to lenders: prevention or protection.
Similar to the short term loans, the “prevention” alternative focuses on the consumer’s ability to repay the loan.  This alternative requires the lender to make a good faith determination at the outset of the loan as to whether the consumer has an ability to repay the loan when due, including all associated fees and interest, without reborrowing or defaulting.  Like short term loans, the lender would be required to determine that the consumer has sufficient income to make the installment payments on the loan after satisfying the consumer’s major financial obligations and living expenses.  The CFPB describes “major financial obligations” as being those expenses that are significant in their amount and cannot be readily eliminated or reduced in the short term and contemplates them including housing payments, required payments on debt obligations, child support and other legally required payments.  The CFPB has disclosed that they are contemplating a broader definition that would also include utility bills and regular medical payments. Under the prevention option, if the consumer is having difficulty making the payments, the lender would be prohibited from refinancing the amount into another similar loan without documentation that the consumer’s financial condition had improved enough to be able to repay the loan.
The CFPB is actually considering two options that would not contemplate an “ability to repay” analysis.  Under both options, the loan term would have a minimum duration of 45 days and a maximum duration of six months and the loan would be required to fully amortize.  The first of these proposals largely mirrors the National Credit Union Administration (“NCUA”) program for “payday alternative loans.”  Specifically, the lender would be required to verify the consumer’s income and that the loan would not result in the consumer having received more than two covered longer-term loans under the NCUA type alternative from any lender in a rolling six month term.  Additionally, assuming the consumer meets the screening requirements, the lender could extend a loan between $200-$1,000 which had an application fee of no more than $20 and a 28% interest rate cap.  .”  See Outline of Proposals Under Consideration and Alternatives Considered , p. 21 (Mar. 26, 2015). As an alternative, the lender could make a loan with payments below a 5 payment to income ration so long as: (a0 the lender verifies the consumer’s income and determines that the loan would not result in the consumer receiving more than two covered longer-term loans under the PTI alternative within a rolling twelve month period.  Assuming the consumer meets this criteria, the lender could make a loan which limits periodic payments to no more than 5% of the consumer’s expected gross income for the payment period.  Id.

In tomorrow’s post, we will discuss the CFPB’s proposal regarding payment collection and their contemplated compliance requirements.

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