Friday, April 10, 2015

The CFPB Payday Proposal (Part Three): Cost Will Drive Players from the Market

Earlier this week, we reviewed the short-term loan and the longer-term loan components of the CFPB’s Payday Proposal.  Today, we turn our attention to the CFPB’s proposal as to collection practices component for these loans, as well as the less publicized compliance component.  As the title of this post suggests, if passed, the CFPB’s proposal will result in a contraction of the market because of the additional cost burden the proposal will place on smaller lenders.


Payment Collection Practices:

The CFPB proposal includes restrictions on collection practices for covered short-term and longer-term loans.  As rationale for the restriction, the CFPB cites to the “substantial risk of consumer harm, including substantial fees and, in some cases, the risk of account closure” which may come if lenders are allowed to collect payment from consumers’ checking, savings and prepaid accounts.  See Outline of Proposals Under Consideration and Alternatives Considered, p. 28 (Mar. 26, 2015). The CFPB therefore proposes to require advanced notice of any lender-initiated attempt to collect payment from a consumer’s account and to restrict the number of attempts to collect payments.


The CFPB proposal would require written notice to a consumer prior to each lender-initiated attempt to collect payment from a consumer’s checking, savings or prepaid account.  The CFPB is contemplating a proposal which would require notice no less than three business days and potentially no more than seven business days prior to each attempt to collect.  The notice would require specific transaction based information be included, including the exact amount and date of the collection attempt, the payment channel through which collection will be attempted, a break down as to how the payment will be applied, the loan balance, and contact information for the lender.  Id., p. 29.  The CFPB is contemplating allowing electronic notification.


The CFPB is concerned that multiple unsuccessful attempts to collect payments results in the consumer incurring insufficient fund charges, returned fees charged by lenders and costs related to account closure.  Therefore, the CFPB proposal would prohibit lenders from making more than two consecutive unsuccessful attempts to collect funds.  After that, the lender would be required to obtain a new authorization from the consumer.

Compliance Requirements:

What is omitted from the CFPB Fact Sheet and its press release is the fact that the CFPB is also considered a proposal to require lenders to maintain policies and procedures that are “reasonably designed to achieve compliance” with the short term and longer term loan proposals.  The compliance piece of the proposal would require that the lender adapt policies and procedures that “would cover the lender’s process for determining ability to repay when originating covered loans; reporting to and checking covered loan information in commercially available reporting systems; maintaining the accuracy of loan information furnished to a commercially available reporting system; documenting the ability to repay determination in the consumer’s loan file; overseeing third party service providers; ensuring that payments notices are provided; and tracking the payment presentments on a loan.” Id., p. 31.

                Record Keeping Requirements:

The proposal contemplates record retention for 36 months, including:

  • Documentation of the ability-to-repay determination;
  • Verification of the consumer’s history of covered loans;
  • Application of any of the alternative requirements for certain loans;
  • Documentation of the payment presentments;
  • Documentation as to whether any attempts triggered the limitation on payment presentments and details of any new authorization; and
  • Documentation of the notices sent prior to collection.

The proposal also contemplates annual reports encompassing data sufficient to monitor performance of covered loans, including information on defaults and reborrowing.

Impacts of the Payday Proposal for Lenders

While there is no doubt that there may be need for reform, the CFPB’s proposal absolves the consumer of any responsibility for good decision making and is likely to have two key impacts: (a) make short term credit harder for consumers to come by; and (b) contract the market.  Both of these impacts are acknowledged by the CFPB. 

                Impact on Consumers:

If the CFPB proposal comes to fruition, short term loans are likely to become largely a thing of the past, a fact acknowledged by the CFPB. The CFPB simulations indicate that using the ability to repay option (“prevention”), loan volume is likely to fall between 69-84%.  Their simulation using the alternative option (“protection”), would result in a 55-62% decline of loan volume.  Id., pp. 40-44.  These simulations take into account only the more restrictive requirements to qualify for short term loans and do not take into account the operational impact on lenders (which will be discussed below).  The CFPB concedes that as a result, it is likely that “[r]elatively few loans could be made under the ability-to-repay requirement.”  Id., p. 45. Moreover, [m]aking loans that comply with the alternative requirements…would also have substantial impacts on revenue.” Id. The CFPB concludes, therefore, that the proposal could lead to substantial consolidation in the market.

Similarly, the impact on longer-term loans is likely to significantly constrict the availability of these loan products.  The data is particularly telling regarding the PTI alternative of 5%/6 months (“Protection”). The CFPB data indicates that less than 10% of current loans would meet the PTI alternative of 5%/6 months. Id., p. 50.

                Impact on Lenders:

If passed, the CFPB proposal will have significant impact on the operational costs involved in making loans which fall within the proposal.  The CFPB acknowledges that lenders may be required to invest in computer systems and software to comply with the record keeping requirements and invest time in developing policies and procedures regarding the new requirements and in training staff.  Additionally, the CFPB acknowledges that entities will be required to invest in contracts with reporting entities as they will be required to be both data furnishers and as users of information.  The CFPB also acknowledges the costs in terms of time for making each loan and collecting it would be significant.  This is particularly true when taking into account the fairly minimal amount of each loan.

Coupling the significant restrictions to qualify for short term credit with revenue and operational impacts, if the proposal comes to fruition no one will win.  Few consumers who truly are in need of short term credit will be able to qualify.  Moreover the cost in making, servicing and collecting these loans will increase exponentially, making it impracticable for lenders to provide these loan products.

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