CFPB Issues Fall Agenda

The CFPB published its Fall 2016 Rulemaking Agenda last week. The Agenda, which is a federal requirement, was issued in the “early fall” and therefore does not take into account the effect the election may have on the CFPB or its current configuration. While the Agenda is worth monitoring and provides insight into the CFPB’s hot button issues, there is no certainty as to what the next six months will hold.

Payday Lending: As most know, the CFPB published its proposed rule on July 22, 2016. The Comment period ended on October 7, 2016. The rule has met significant opposition and it is telling that no further estimation or target dates have been set by the CFPB for a final rule.

TRID: The CFPB published its proposed amendments to TRID in the form of a Notice of Public Rulemaking in July 2016.The proposed amendments “memorialize the Bureau’s informal guidance on various issues and include clarifications and technical amendments.” The comment period expired October 18, 2016 and the Bureau has set a target date of March 2017 for publication of the Final Rule.


Overdrafts: Since at least the spring of 2015, the CFPB has indicated that they are conducting research to assess whether rulemaking is warranted. Since then, the CFPB does not appear to have made much public headway. The Fall Agenda, like its recent predecessors, indicates the Bureau is still engaged in pre rule making activities. The Rulemaking Agenda bumps the target date for further activity from August 2016 to January 2017 for further pre-rule making activity.

Debt Collection: One of the biggest stories that remains is when a proposed rule as to debt collection will be issued. The CFPB has not committed to a time line but has made progress. In a surprise to many, the CFPB has bifurcated the process by addressing third party and first party collections separately. A SBREFA Panel was convened as to the CFPB’s third party debt proposal in August 2016 and the CFPB continues to meet with interested parties. A proposal as to first party collections is the next likely step. The CFPB estimates further pre-rule activities in February 2017.

Arbitration: The CFPB published its proposed Arbitration Rule in the form of a Notice of Public Rulemaking in May 2016 and has targeted February 2017 for a final rule.

Women owned, Minority owned and Small Business Data Collection: The CFPB is in the early stages of developing rules to require financial institutions to report information about their lending to women-owned, minority owned and small businesses. The CFPB has indicated a desire to model any data collection after their recently released HMDA Rules. Pre-rule activities are expected to continue in the first part of 2017.

Supervision of Larger Participants in Installment Loan and Vehicle Title Loan Markets: The CFPB is considering rules expanding its larger participants supervision to include consumer installment loans and vehicle title loan markets. The Bureau is also considering “whether rules to require registration of these or other non-depository lenders would facilitate supervision”. The CFPB has targeted May 2017 for pre-rule activities.

The CFPB Issues Report Condemning Auto Title Loans

In advance of issuing it’s rulemaking on pay day loans and other short term loans, the CFPB has issued its scathing Report on Single-Payment Vehicle Title Lending. Last year, the CFPB issued its pay day proposal to end “debt traps”. In that proposal, the CFPB proposed eliminating or significantly curtailing short term credit products which were secured by liens on the consumer’s vehicle. Today’s Report is likely to be used in support of the forthcoming rulemaking. Vehicle title loans are allowed in about half of the United States and allow consumers to secure a short term single payment loan using their vehicle’s title as collateral. The vehicle must be owed free and clear and the loan is generally based upon the value of the vehicle.

 

The Report is based upon the CFPB’s examination of nearly 3.5 million loans made in ten states between 2010 and 2013 (the height of the economic crisis). In the Report, the CFPB makes the following key findings:

 

• The average loan was $959 and carried an APR of 317%;
• Of the loans studied, 87% were reborrowed within 60 days;
• The loans have a high rate of default. A majority of the loans are reborrowed and of those, roughly 20% default and end up as repossessions;
• More than half of the loans become long term debt. In other words, over half roll over the loan four times or more; and
• As a result of the high percentage of rollover, loan sizes increase exponentially due to additional fees and interest.

The CFPB is considering a proposal which sets forth two alternative path for lenders to take when dealing with short term credit products: prevention and protection. Short term credit products are defined as being those credit products that would require the consumer to pay back the loan in full within 45 days. Lenders will have the ability to choose one of two business models:  

 

Prevention:

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. For each loan, the lender would be required to verify the consumer’s income, major monthly financial obligations and borrowing history (with the lender, its affiliates and possibly other lenders). A lender would generally have to comply with a 60-day cooling off period between loans. A second or third loan could only be made within the 60-day cooling off period where the lender could document a change in the borrower’s financial condition. In any event, after three covered short term loans, a mandatory 60-day cooling off period would have to elapse before the lender could make a covered short term loan to the consumer. 

 

Protection:

The “protection” alternative focuses on the repayment options and limiting the number of short terms loans a buyer could take out in any twelve month period. Under this alternative, a lender would not be required to determine the consumer’s ability to repay. Instead, the loan could not: (a) exceed $500; (b) be secured by the consumer’s vehicle; (c) carry more than one finance charge; (d) rollover more than twice; and (e) any rollover would have to taper off. The CFPB is contemplating two “tapering” alternatives. Under the first, the amount of principal on each rollover would taper in such a manner as to prevent an unaffordable balloon payment when the third payment is due. Under the second, the lender would be required to provide a no-cost extension to the consumer if the consumer was not able to pay off the loan in full at the end of the third loan.

  

In its Fall Rulemaking Agenda, the CFPB indicated that its rules on short term loan products were in the proposed rulemaking stage. Many in the industry expect the rules to be published shortly.

 

 

 

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.

Notice:

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.

                Limitations:

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.

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.

Prevention:

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.

Protection:

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.

The CFPB Proposal to End Payday Debt “Traps”: Part 1

A little over a week ago, the CFPB announced that it is considering rules that would “end payday traps by requiring lenders to take steps to make sure consumers can repay their loans.”  See Press Release, “CFPB Considers Proposal to End Payday Debt Traps.” If the final rules bear resemblance to the CFPB’s current proposal, they are likely to cause a significant contraction in both the market place and in consumer access to short term loan programs.    

Publication of a proposed rule is not likely until at least the late summer or fall.  Because the rules may have a significant economic impact on a substantial number of small entities, the CFPB is required to convene a small business advisory review panel to provide input as to the impact of the proposed rules.  Within sixty days of convening the Panel is required to issue a report setting forth the potential impacts of complying with the proposed regulations and feedback on the potential options and alternatives to minimize the economic impact.  After that, the CFPB will still be required to publish the proposed rule, seek comments and publish a final rule with an implementation period. 

The CFPB provides as its rationale for the proposal that the loan products at issue are harmful because “the loans are structured with payments often beyond a consumer’s ability to pay, forcing the consumer to choose between default and repeated reborrowing.”  See Outline of Proposals Under Consideration and Alternatives Considered, p. 3 (Mar. 26, 2015).   The CFPB goes on to contend that because these loan products often provide liens on motor vehicle titles or provide for repayment from consumer’s account of paychecks, lenders have “less incentive to carefully underwrite the loan and consumers face a greater risk that they will lose their transportation to work, incur bounced check fees and other charges, or experience other bank account problems if they fall behind.”  Id., pp. 3-4/   The CFPB’s proposal contemplates rule making for short term loans (those defined as requiring payment in full within 45 days), as well as higher cost longer term loan products.

Today’s entry will focus on the short term loan proposal with additional entries to follow regarding the longer-term loan proposal, the collection practice procedures and compliance measures proposed as to both, and our assessment of the problems presented by the proposal.

The Proposal: Prevention and Protection

The CFPB’s proposal regarding short term credit products sets forth two alternative path for lenders to take when dealing with short term credit products: prevention and protection.  Short term credit products are defined as being those credit products that would require the consumer to pay back the loan in full within 45 days.  Lenders will have the ability to choose one of two business models:

                Prevention:

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.  For each loan, the lender would be required to verify the consumer’s income, major monthly financial obligations and borrowing history (with the lender, its affiliates and possibly other lenders).   A lender would generally have to comply with a 60-day cooling off period between loans.  A second or third loan could only be made within the 60-day cooling off period where the lender could document a change in the borrower’s financial condition.  In any event, after three covered short term loans, a mandatory 60-day cooling off period would have to elapse before the lender could make a covered short term loan to the consumer. 

                Protection:

The “protection” alternative focuses on the repayment options and limiting the number of short terms loans a buyer could take out in any twelve month period.   Under this alternative, a lender would not be required to determine the consumer’s ability to repay.  Instead: (a) the loan could not exceed $500; (b) be secured by the consumer’s vehicle; (c) carry more than one finance charge; (d) rollover more than twice; and (e) any rollover would have to taper off.  The CFPB is contemplating two “tapering” alternatives.  Under the first, the amount of principal on each rollover would taper in such a manner as to prevent an unaffordable balloon payment when the third payment is due.  Under the second, the lender would be required to provide a no-cost extension to the consumer if the consumer was not able to pay off the loan in full at the end of the third loan.

Tomorrow’s entry will focus on the proposal regarding Longer-Term Loans.