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CFPB Small Dollar Rule Issued
On Thursday, October 5, 2017, the CFPB is releasing its long-awaited small dollar lending rule. According to the CFPB, the rule aims to stop debt traps and apply to loans that require consumers to repay all or most of the debt at once. Under the new rule, lenders must conduct a "full-payment test" to determine upfront that borrowers can afford to repay their loans without re-borrowing.
(The OCC has also announced it is rescinding the supervisory guidance entitled "Guidance on Supervisory Concerns and Expectations Regarding Deposit Advance Products" and OCC Bulletin 2013-40, in light of the adoption of the final CFPB Rule.)
The full-payment test would require lenders to determine whether the borrower can afford the loan payments and still meet basic living expenses and major financial obligations. For payday and auto title loans that are due in one lump sum, full payment means being able to afford to pay the total loan amount, plus fees and finance charges within two weeks or a month. For longer-term loans with a balloon payment, full payment means being able to afford the payments in the month with the highest total payments on the loan. The rule also caps the number of loans that can be made in quick succession at three.
For certain short-term loans, lenders can skip the full-payment test if they offer a "principal-payoff option" that allows borrowers to pay off the debt more gradually. Under this option, consumers may take out a short-term loan of up to $500 without the full-payment test if it is structured to allow the borrower to get out of debt more gradually. Under this option, consumers may take out one loan that meets the restrictions and pay it off in full.
The rule requires lenders to use credit reporting systems registered by the Bureau to report and obtain information on certain loans covered by the proposal.
The rule allows alternative loan options, including certain loans typically offered by community banks and credit unions, to forgo the full-payment test. Loans that pose less risk to consumers do not require the full-payment test or the principal-payoff option. These include:
- Loans made by a lender who makes 2,500 or fewer covered short-term or balloon-payment loans per year and derives no more than 10 percent of its revenue from such loans.
- Loans that generally meet the parameters of "payday alternative loans" authorized by the National Credit Union Administration.
- The rule also excludes from coverage certain no-cost advances and advances of earned wages made under wage-advance programs offered by employers or their business partners.
- The new rule also includes a "debit attempt cutoff" for any short-term loan, balloon-payment loan, or longer-term loan with an annual percentage rate higher than 36 percent that includes authorization for the lender to access the borrower's checking or prepaid account.
The rule also includes a debit attempt cutoff that applies to short-term loans, balloon-payment loans, and longer-term loans with an annual percentage rate over 36 percent that includes authorization for the lender to access the borrower's checking or prepaid account. After two straight unsuccessful attempts, the lender cannot debit the account again unless the lender gets a new authorization from the borrower.
The final rule does not apply ability-to-repay protections to all of the longer-term loans that would have been covered under the proposal. The CFPB is conducting further study to consider how the market for longer-term loans is evolving and the best ways to address concerns about existing and potential practices.
The rule takes effect 21 months after it is published in the Federal Register, although the provisions that allow for registration of information systems take effect earlier.
All lenders who regularly extend credit are subject to the CFPB's requirements for any loan they make that is covered by the rule. This includes banks, credit unions, nonbanks, and their service providers. Lenders are required to comply regardless of whether they operate online or out of storefronts and regardless of the types of state licenses they may hold. These protections are in addition to existing requirements under state or tribal law.