CFPB’s Rulemaking Agenda Provides Glimpse into 2020

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The CFPB’s 2020 Rulemaking Agenda provides a preview of the Bureau’s intended rulemaking activities for 2020.  Here are the highlights of what we can look forward to in 2020:


Business Lending Data (Pre-rule Stage):  Under Dodd Frank and the Equal Credit Opportunity Act, the CFPB has rulemaking authority to require lenders to collect and submit data concerning credit applications made by women-owned, minority-owned and small businesses.  The Bureau intends to hold a symposium on small business data collection in 2020. 


Higher-Priced Mortgage Loan Escrow Exemption (Pre-rule Stage): The Bureau is conducting preliminary analysis for rulemaking which would exempt certain lenders and higher priced mortgage loans from the FRB rule requiring the establishment of escrow accounts for payment of property taxes and insurance payments.


Debt Collection Rule (Proposed Rule Stage): The Agenda does not provide any further hints as to when a final rule will be published but does acknowledge that the Bureau is conducting consumer testing of disclosures related to time-barred debt.  Proposed Section 1006.26(c) was reserved for that purpose.  The Agenda indicates that, after testing, the Bureau will assess whether to publish a supplemental Notice of Proposed Rulemaking related to time-barred debt disclosures.  No anticipated date for a final rule is included in the Agenda which may suggest a delay to allow the Bureau to include the time-barred debt provisions before publication of the final rule.


Home Mortgage Disclosure Act Data (Proposed Rule Stage):  The Bureau has indicated new proposed rules will be forthcoming as to the publication of HMDA data, as well as the collection and reporting of data points.  The anticipated date for the NPRM is mid-summer.


Payday Lending (Final Rule):  As many recall, the CFPB rolled back the final rule issued in 2017 after a change in leadership.  The CFPB now anticipates publishing its new rule in the Spring of 2020.

Mulvaney Reins in the CFPB

On November 24, 2017, the White House appointed Mick Mulvaney as acting director of the CFPB, effective November 27, 2017.  Since then, concerns have been raised that Mulvaney might ‘gut” the agency.  Here is a quick look at the actions of the agency since Mulvaney’s appointment:

• December 2017: The CFPB has changed its mission statement.  Previously the mission statement read: “The Consumer Financial Protection Bureau is a 21^st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives”  The mission statement now reads: “The Consumer Financial Protection Bureau is a 21^st century agency that helps consumer finance markets work by regularly identifying and addressing outdated, unnecessary, or unduly burdensome regulations by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.” (emphasis supplied).
• December 2017:  Various actions of the CFPB indicate debt collection rulemaking is on hold.  Specifically, the CFPB withdrew its request to the OMB to conduct an online survey of consumers as part of its debt collection disclosures.
• January 16, 2018: The CFPB announced its intentions to reconsider the final payday rule which took effect January 16, 2018.
• January 17, 2018: Director Mulvaney informed the Fed that the CFPB will forego any funding for the Second Quarter of 2018, stating its intent to spend down the CFPB’s reserve fund prior to requesting any additional funding. In his letter to Fed Chair Janet Yellen, Mulvaney states as follows:
  I have determined that no additional funds are necessary to carry out the authorities of the Bureau for FY 2018, Q2.  Simply put, I have been assured that the funds currently in the Bureau Fund are sufficient for the Bureau to carry out the statutory mandates for the next fiscal quarter while striving to be efficient, effective, and accountable.”
• January 17, 2018: The CFPB stated its intent to publish in the Federal Register a series of Requests for Information seeking comment on its enforcement, supervision, rulemaking, market monitoring and education activities. The Release quotes Mulvaney as stating that “[i]n this New year, under new leadership, it is natural for the Bureau to critically examine its policies and practices to ensure they align with the Bureau’s statutory mandate.” The first of those RFIs will review the Bureau’s Civil Investigative Demand processes and procedures.

The actions of Mulvaney thus far indicate the Trump administration, at a minimum, will significantly reign in the CFPB.  The question becomes: will they go too far?

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.

A Primer to the CFPB Proposed Payday Rule: What You Need to Know

Earlier this summer, the CFPB issued its proposed payday rule. Hailed as an attempt to end “payday traps”, the 1,334 page missive addresses both short term loans and certain longer term high cost loans. In addition to restricting the structure of loans, the proposed rule places limitations on how lenders collect on covered loans and mandates extensive record retention policies. The period to comment on the proposed rule runs through September 14, 2016 and stake holders are encouraged to review the proposed rule carefully and submit comments as appropriate.

In a Nutshell. The proposed rule places limitations on short term loans, as well as certain higher cost longer term loan products. Covered 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. Proposed 1041.3(b)(1). Covered longer term loan products are those which have a total cost of credit exceeding 36% and are repaid directly from the consumer’s account or income or are secured by the consumer’s vehicle. See Proposed 1041.3(b)(2). The proposed rule applies to a wide variety of loan products and will impact nonbank lenders, as well as banks and credit unions. Importantly, the pay day rule excludes from coverage purchase money security credit secured solely by a car or other purchased consumer goods, real property or dwelling secured credit if the lien is recorded or perfected, credit cards, student loans, non-recourse pawn loans, overdraft services and lines of credit. Proposed 1041.3(e).

Short Term Loan Products
 When the CFPB first rolled out its payday proposal in 2015, it couched its two alternatives for lenders making short terms loans as “prevention” and “protection”. The proposed rule leaves those two alternatives largely intact. 

Prevention or the Ability to Repay. Under the proposed rule, it is an abusive or unfair practice for a lender to make a covered short term loan without reasonably determining the consumer’s ability to repay the loan. See Proposed §1041.4. Under the proposed rule, the lender is required 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 is required to verify the consumer’s net income and major financial obligations through the consumer’s written statement, as well as independent verifying sources. The lender additionally is required to take into account the consumer‘s basic living expenses and review the consumer’s borrowing history from the records of the lender and its affiliates, as well as the consumer’s credit report. See Proposed 1041.5(b) and 1041.6(a)(2). There is a rebuttable presumption that a consumer does not have the ability to repay during any period in which the consumer has certain other covered and non-covered loans and for 30 days thereafter. Proposed 1041.6(b). Additionally, a lender would be prohibited from making a covered short term loan to a consumer who has already taken out three covered short term loans within 30 days of each other.

Protection or the Principal Payoff Exemption. The “protection” alternative focuses on the consumer’s repayment options and limits the number of short terms loans a consumer may take within a twelve month period. Under this exemption, a lender is not required to assess the consumer’s ability to repay but is required to consider the consumer’s borrowing history. Proposed 1041.7(a). Section 1041.7 allows the lender to make a series of three tapering closed end loans of which the initial loan cannot not exceed $500, the second loan cannot be greater than two thirds of the principal amount of the first loan in the sequence, and the third loan cannot not be greater than one third of the principal amount of the first loan in the sequence. The rule additionally restricts the amortization and allocation of payments to principal and interest and prohibits the loans from being secured by the consumer’s vehicle. This alternative is not available if it would result in the consumer having more than six short-term loans during a consecutive 12 month period or being in debt for more than 90 consecutive days on covered short term loans during a consecutive twelve month period. Proposed 1041.7(c). Lenders using this exemption will be required to provide the consumer with certain mandated, clear and conspicuous disclosures. Proposed 1041.7(e). Model forms are provided within the proposed rule.
Longer Term Loan Products
 The proposed rule not only covers traditional payday loans, but also “longer-term” credit products. Specifically, the rule regulates 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. Proposed 1041.3(b)(2). Like short term loans, the rule offers alternative “prevention” and “protection” approaches and does not vary significantly from the Bureau’s initial proposal. 

Prevention or the Ability to Repay Option. Similar to short term loans, 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. Proposed 1041.9. As is the case with the short term loan provisions, the lender is 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 rule describes “major financial obligations” as being a consumer’s housing expense, minimum payments and any delinquent amounts due under any debt obligation, child support and other legally required payments. Proposed 1041.9(a)(2). The rule additionally requires the lender, in assessing the consumer’s ability to repay, to take into account the possible volatility of the consumer’s income, obligations or basic living expenses during the term of the loan. Proposed Comment 1041.9(b)(2)(i)-2. Similarly, the rule adds additional rebuttable presumptions of unaffordability for longer term loans. See generally Proposed 1041.10. 

Protection or Alternative Exemptions. For longer term loans, the rule provides two exemptions to the ability to repay requirement. Under both exemptions, the loan term must be of a minimum duration of 46 days and the loan would be required to fully amortize. The first of these exemptions largely mirrors the National Credit Union Administration (“NCUA”) program for “payday alternative loans” and is referred to by the CFPB as the “PAL approach”. Specifically, the lender is 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. Proposed 1041.11.

The second exemption allows the lender to make loans that meet certain structural conditions and is referred to by the CFPB as the “Portfolio approach”. Small lenders using this approach will be required to conduct underwriting but would have flexibility to determine what underwriting to undertake subject to the conditions set forth in Proposed 1041.12. Among the conditions, the loan is required to have fully amortizing payments and a term of not less than 46 days nor more than 24 months. Proposed 1041.12. Additionally, the loan cannot not carry a modified total cost of credit of more than 36% excluding a single origination fee of no more than $50 (or that is originally proportionate to the lender’s underwriting costs). Proposed 1041.12(b)(5). Additionally, the projected annual default rate on all loans made pursuant to this alternative must not exceed 5% and the lender would be required to refund all origination fees paid by borrowers in any year in which the annual default rate to in fact exceed 5%. Proposed 1041.12(d).

Payment Restrictions

All covered loans, whether short term or longer term, are subject to certain collection restrictions. As rationale for the restriction, the CFPB has cited 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 proposed rule contains two key notice requirements. First, lenders are required to provide at least three business days advanced written notice before any attempt to withdraw payment from a consumer’s checking, savings or prepaid account. Prohibited payment transfers are defined broadly and include electronic fund transfers, ACH transfers, and an account holding institution’s transfer of funds. Proposed 1041.14(a)(1). The proposed notice requirements are specific and model forms are included within the rule. In general, however, the notice must contain specific transaction based information 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. Proposed 1041.15. 

Secondly, the proposed rule prohibits a lender from initiating a payment transfer from a consumer’s account in connection with a covered loan after the lender’s second consecutive attempt to withdraw payment has failed for lack of sufficient funds unless and until the lender obtains from the consumer a new and specific authorization to make further withdrawals. Proposed 1041.13.

Compliance Requirements.

The rule imposes new reporting, record keeping and compliance requirements. In general, the rule requires lenders to furnish information regarding covered loans to all registered information systems which presumably will include the national consumer reporting agencies. See generally Proposed 1041.16. The proposed rule requires lenders to furnish particular information about the consumer and the loan throughout the loan’s history. 

If finalized, the rule will also mandate a 36 month retention period for most records (paper and electronic) relevant to the loan and its history. Section 1041.18(b) requires the lender retain the loan agreement, as well as certain documentation obtained in connection with a covered loan including: the consumer report, verification evidence, written statement of expenses obtained from the consumer and payment authorizations. Additionally, the lender is required to retain certain electronic records in tabular form which document, among other things, the lender’s process for determining the consumer’s ability to repay the loan, the payment history and loan performance. 

Finally, the rule mandates the establishment of a compliance management system for lenders who choose to make loans covered by the proposed rule. Lenders are required to establish a compliance program that is “reasonably designed to ensure compliance” with the approving and making of covered loans. The rule requires lenders adopt written policies and procedures appropriate to the size and complexity of the lender and its affiliates and the nature and scope of their covered loan lending activities. See Proposed §1041.18.

 Impacts of the Proposed Payday Rule

While there is no doubt that there may be need for reform, the proposed rule 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 small lending market. Both of these impacts are acknowledged by the CFPB and are of concern to stakeholders.   

Impact on Consumers. In its present form, the rule significantly curtails short term loans, 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. Outline of Proposals under Consideration and Alternatives Considered, pp. 40-44 (Mar. 26, 2015). 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.

Impact on Lenders. In its present form, the proposed rule significantly increases the operational costs involved in making covered loans. Lenders will 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 costs in terms of time for making each loan and collecting it will be significant. This is particularly true when taking into account the fairly minimal amount of each loan.

It is important to note that the payday rules have been issued under the CFPB’s authority to prevent unfair, deceptive and abusive practices. While there is no private right of action provided within the rules, it will provide another avenue for litigation as consumer attorneys are likely to boot strap violations of the rules as a violation of state unfair and deceptive trade practice statutes. Moreover, in addition to the aforementioned increase in operational and underwriting costs of making covered loans, the rules will add an additional layer of examination requirements on federal regulators.  

Already, stakeholders are expressing serious concerns about the proposed rule. In a recent letter to the CFPB, the Independent Community Bankers and Credit Union National Association have indicated that if passed in its present form, the rule “would unquestionably disrupt lending by credit unions and community banks.” Letter to Director Richard Cordray (June 27, 2016). The letter notes that “[t]he requirements outlined in the proposed rule…are extremely complex and prescriptive, and inconsistent with how credit unions and community banks that know their members and customers underwrite a loan that can be for a relatively small amount of money… subjecting them to a lengthy list of requirements would undoubtedly significantly reduce consumer options for these loan products.” Id. 

Congress has additionally inserted itself in the discussion. The House 2017 Financial Services Bill seeks to delay finalization of the rule until the CFPB submits a detailed report, with public comment, on the consumer impact and identifies existing short term credit products to replace the current sources of small term, small dollar credit. Press Release: Appropriations Committee Approves Fiscal Year 2017 Financial Services Bill (June 9, 2016).


Conclusion

As noted, the comment period for the proposed rule will run through September 14, 2016 and stakeholders should review the proposed rule carefully with counsel and submit comments as appropriate. It is clear that the payday proposed rule has the attention of the legislative branch as well as major stakeholders and it is likely there will be some modifications before a final rule is adopted. When finalized, the CFPB has proposed that the final rule will not take effect under 15 months after publication of the final rule. There appears, therefore, to be a fairly lengthy time period for the industry to ramp up in anticipation of the effective date.

What to Expect in the Proposed Pay Day Lending Rules

It is anticipated that the CFPB will unveil their proposed pay day lending rules at tomorrow's field hearing in Kansas City.  The subject of the field hearing is, of course, small dollar lending.  Over a year ago, the CFPB released its proposal for pay day lending in advance of the SBREFA panel being convened on the same issue.  Here are a few things to look for when the Rule is released:

• The proposed rule is likely to require all short term loans take into account the consumer's ability to repay without defaulting or re-borrowing.  We anticipate that the Rule's ability to repay will be modeled after the mortgage rules.  One of the big talking points the CFPB pushed forward last Spring was requiring that the lender make a good faith determination at the outset of the loan to determine 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). 
• The proposed rule is likely to set limits on rollovers.  Last spring, the CFPB suggested they would require a 60 day cooling off period between loans and limit rollovers to those circumstances where the lender could document a change in the borrower's financial condition.  Don't be surprised if the proposed rule limits the number of rollovers and limits the conditions upon which rollovers may be made.
• The proposed rule may ban vehicle title loans.  As we indicated in a prior post, the CFPB recently issued a scathing report condemning title loans. Don't be surprised if the proposed rule either bans or significantly curtails vehicle title loans.
• The proposed rule is likely to curtail certain collection techniques - particularly, account drafts.  Don't be surprised if the Rule requires prior written notice to the consumer prior to the lender initiating a draft on the consumer's account.
• The proposed rule is likely to impose onerous data collection and record keeping requirements on pay day lenders.  The 2015 proposal contemplated significant record keeping requirements. In addition to requiring record retention, it would not be a surprise to see reporting requirements similar to those included in the arbitration rule requiring periodic reporting to the CFPB by small dollar lenders.

CFPB Rulemaking Agenda Confirms Pay Day Rulemaking is Imminent and Plays its Cards Close as to Debt Collection

The CFPB published an aggressive Spring 2016Rulemaking Agenda this week.  Two big takeaways:  The proposed pay day rules will be published within the next few weeks and the Bureau is not providing much of an update on its debt collection rulemaking.  While no definitive dates were provided, the Agenda does give some insight as to an expected time frame for several hot button issues:

 Payday Lending:   The CFPB has confirmed in its press release related to the agenda that it expects to release the proposed rule in the "next several weeks."  The press release suggests that the proposed rule is likely to require all short term loans take into account the consumer's ability to repay without default or re-borrowing.  The proposed rule is also likely to limit the number of rollovers for a loan, prohibit auto title loans, and place limitations on repayment by bank account draft. 

 

Mortgage Servicing:  The CFPB expects to amend certain aspects of the mortgage servicing rules this summer including enhanced loss mitigation requirements and compliance requirements when a borrower is in bankruptcy. 

 

TRID:  Also consistent with recent statements, the Spring Agenda indicates that the CFPB expects to issue a Notice of Proposed Rulemaking clarifying certain aspects of TRID.  Since it took effect, the mortgage industry has raised a number of concerns with ambiguities in the Loan Estimate and Closing Disclosure.  The NPR is likely to address at least some of those issues.

Prepaid Financial Products:  Last fall, the CFPB indicated it expected to issue its final rule on prepaid financial products in early 2016.  The latest press release indicates that the final rule will be released some time this summer.

 Overdrafts:  In the spring of 2015, the CFPB indicated that they were continuing to conduct additional research to assess whether rulemaking is warranted and did not issue a time table for rulemaking.  Since then, the CFPB does not appear to have made much public headway.  The Spring 2016 Agenda indicates the Bureau is still engaged in pre rule making activities.

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. Prerule activities continue and the industry should be on the lookout for the convening of a SBREFA Panel as the next likely step.  The CFPB indicates that they are engaged in consumer testing initiatives to “determine what information would be useful to consumers to have about debt collection and their debts and how that information should be provided to them.” 

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.  Prerule activities are in the initial stage and expected to continue through the third quarter of 2016.

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.

 

 

 

Cordray Confirms Activity in Rulemaking

In his prepared remarks to the Consumer Bankers Association last week, Richard Cordray provided a laundry list of regulatory and rulemaking activities currently being undertaken by the CFPB.  For those keeping track:

• Cordray's remarks suggest that a final proposed rule regarding prepaid accounts in imminent;
• Likewise, a notice of proposed rule concerning pay day loans and other small dollar loans will be published in the coming moths;
• Likewise, the CFPB is preparing to issue a notice of proposed rulemaking on the use of arbitration clauses in consumer finance contracts;
• Cordray's remarks also confirmed activity regarding the incidence and transparency of overdraft fees;
• Cordray acknowledged that the CFPB is focused on debt collection but his remarks were oddly silent as to the status of the CFPB's efforts in that regard;
• Cordray also acknowledged that the CFPB has begun working to establish a rule governing the collection and publication of data on small business lending;
• Cordray's remarks also confirmed the CFPB is actively engaged in working to improve the credit reporting market and more specifically, is focused on the accuracy of screening processes used  by depository institutions; and
• Finally, Cordray confirmed the CFPB's continued partnership with the Department of Justice to "identify and stamp out discrimination in auto lending practices."

While providing no hard timelines, Cordray at least confirmed the current priorities of the CFPB regulatory agenda.  For those keeping track, the CFPB's fall rulemaking agenda had anticipated a Notice of Proposed Rulemaking concerning payday lending in early 2016 with a target date of February. 

CFPB Testimony Concerning Payday Lending Offers No New Insight

Acting Deputy Director David Silberman appeared before the House Committee on Financial Services’ Subcommittee on Financial Institutions and Consumer Credit this week to testify concern payday lending.  Silberman, who also serves as the Associate Director of Research, Markets and Regulations for the CFPB, provided a lengthy history to the subcommittee regarding the status of the CFPB regulation of payday lending.  The majority of Silberman’s prepared remarks recounted the CFPB research, field hearings, and concerns with payday lending. Silberman’s comments indicated there had been no softening of the CFPB’s stance concerning payday lending since it issued its proposal to end “payday debt traps” in April of last year.  It did, however, confirm that the CFPB continues to meet with the stakeholders, including state policy makers and tribal governments.  

Most notably, Silberman’s prepared remarks outlined the concerns which have been raised by various stakeholders.  Silberman noted that consumer advocates are pushing for an across the board ability to repay standard. He also noted that industry stakeholders have raised concerns that the proposal is too restrictive, particularly as to the limitation on the number of consecutive loans.  With regard to state policy makers, Silberman’s remarks indicate concerns with conflicts which may arise between current state laws and any impending CFPB rules.  While not stated, it is likely that these concerns are coming from states which have statutes in place which entirely preclude the making of payday or short term loans.  Finally, Silberman noted that tribal governments are concerned with the effect any regulation will have on the revenues they receive from these products.  Silberman concluded his comments by noting that the next step will be the formal issuance of a proposed rule.  While Silberman did not indicate a time table for doing so, the CFPB’s most recent Rulemaking Agenda suggests that a proposed rule is imminent and likely to be some time in the next thirty days.

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.