On Thursday October 5, the Consumer Financial Protection Bureau (CFPB) issued a long-awaited final rule governing certain short-term loans and longer term loans involving balloon payments, better known as the payday lending rule. The rule is expected to dramatically impact the short-term loan industry, imposing numerous new restrictions on both short-term lenders (including “payday” lenders and auto title lenders), and lenders offering longer-term loans with large, final balloon payments. Summary of the Rule The final rule’s most significant new requirement on lenders is a mandatory upfront “full-payment test” on consumers. The test will require that lenders not only determine that a consumer can afford to repay the loan and fees, but can do so while still meeting basic living expenses and major financial obligations during the term of the loan and for 30 days after the loan’s highest required payment. This will require lenders to not only verify a borrower’s income, but also determine the borrower’s major financial obligations, and estimate the borrower’s basic living expenses. Other major provisions of the final rule include:
- The Principal Payoff Option: Lenders who issue loans under $500 and do not take car title as collateral may avoid the “full-payment test” if they structure the loan to allow the consumer to get out of debt more gradually. This option allows a lender to offer up to two additional loans (for a total of three) if the borrower pays off at least one-third of the original principal with each extension;
- Cap on Successive Loans: Lenders may issue no more than three short-term loans (or covered longer-term loans with a balloon payment) to a borrower in quick succession, and must obey a 30-day “cooling-off period” after the third covered loan;
- Reporting Systems: Lenders must use credit reporting systems to report and obtain information about loans made under the full-payment test or principal payoff option;
- Limits and restrictions on withdrawal attempts: Covered lenders face new restrictions on debiting a borrower’s bank account;
- Exemption aimed at community banks and credit unions: Lenders are exempt from the full payment test and principal payoff options if they make fewer than 2,500 covered short-term or balloon payment loans per year and derive less than 10% of their revenue from these loans.
* * *Maria Earley is a partner in Reed Smith’s Financial Services Regulatory Group in Washington, D.C. She is a former enforcement attorney with the CFPB. Evan Thorn is a senior associate, also in the Financial Services Regulatory Group in Washington. Maria, Evan and several other Reed Smith attorneys have significant experience handling matters involving the CFPB, including two recently-resolved CFPB enforcement matters in the payday lending space. If you have questions about this rule, payday lending issues, or the CFPB, please do not hesitate to contact a member of the Reed Smith financial services regulatory team.