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To be sure, the October 5 final rule is groundbreaking in a number of ways. Notably, it marks the first time that ability-to-repay requirements have been explicitly imposed at the federal level on short-term consumer loans of the type that are covered. It is also the first federal regulation explicitly restricting repeated attempts by lenders of such loans to withdraw payments from consumers’ accounts.,Although more narrowly focused than its proposed version, the CFPB’s final payday rule is nonetheless quite detailed and imposes several new requirements.,Different aspects of the rule apply to two types of covered loans. (And, as discussed below, certain types of loans that might otherwise be covered are excluded from the rule entirely.),First, the rule has underwriting provisions that apply to many short-terms loans that have terms of 45 days or less, including vehicle title loans, as well as to many longer-term balloon-payment loans.

These underwriting provisions generally require lenders to conduct what the CFPB calls a “full-payment test” to make a reasonable determination that the applicant would be able to make the payments on the loan and be able to meet the consumer’s basic living expenses and other major financial obligations without needing to re-borrow over the next 30 days. This test includes requirements to verify the consumer’s net monthly income, debt obligations, and housing costs, and to forecast a reasonable amount for basic living expenses.
Lenders also must observe a mandatory “cooling-off” period: a lender is prohibited from making a covered short-term loan to a consumer who has already taken out three covered loans in which each loan is within 30 days of another covered loan, as to that borrower, the lender must wait 30 days after the third loan is no longer outstanding.,Alternatively, a lender may make a covered short-term loan without meeting these underwriting criteria if the loan meets certain specific terms, the lender confirms that the consumer meets specified borrowing history conditions, and the lender provides certain required disclosures to the consumer. For example, as described by the CFPB, “a lender is allowed to make up to three covered short-term loans in short succession, provided that the first loan has a principal amount no larger than $500, the second loan has a principal amount at least one-third smaller than the principal amount on the first loan, and the third loan has a principal amount at least two-thirds smaller than the principal amount on the first loan.” However, a lender is not permitted to take a non-purchase-money security interest in a vehicle in connection with loans made under this alternative approach. (Purchase money auto loans, as noted below, are excluded from the rule altogether.),Second, certain parts of the rule also apply to other unsecured consumer loans with terms of more than 45 days that have (1) an APR exceeding 36 percent, and (2) a form of “leveraged payment mechanism” that gives the lender the right to withdraw payments from the consumer’s account, such as a checking account.

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For these loans, as well as the loans subject to the ability-to-pay requirements, the rule states that it is an unfair and abusive practice for a lender to attempt to withdraw payment from the consumer’s account after the lender’s second consecutive failed attempt due to a lack of sufficient funds, unless the lender obtains the consumer’s new and specific authorization to make further withdrawals.,These parts of the final rule will become effective 21 months after publication of the final rule in the Federal Register, which is expected soon. The rule also requires lenders to use credit reporting systems registered with the CFPB to report and obtain information on certain loans, those provisions will become effective 60 days after publication of the final rule in the Federal Register.,As mentioned above, the payday rule does not address some of the most hotly scrutinized issues in state law, such as permissible interest rates and fees. The CFPB lacks the authority to set interest rates and fees, and so that issue is left to state law.
As the CFPB does not license entities, the states also will continue to run their own licensing regimes. And even where the CFPB’s rule addresses matters covered by state law, those state laws will be preempted only to the extent of any inconsistency with the rule. “Accordingly, the arguments advanced by some commenters that the payday rule would ‘occupy the field’ are incorrect,” the CFPB stated in the preamble to the final rule.,Any type of loan that appears to pose such risks could potentially attract the CFPB’s attention going forward.,The CFPB’s concerns about small consumer loans echo many of those long expressed by other federal banking regulators—though recent leadership changes at the Office of the Comptroller of the Currency (OCC) make it less certain what the OCC’s approach will be going forward.,At the same time, the FDIC and the other agencies have also cautioned their supervised institutions about concerns associated with one type of small consumer loan in particular: deposit advance products (DAP).,DAPs would be covered by the CFPB payday rule if they otherwise have the features of covered loans as described in the rule.
While the rule carves out loans akin to those made under the NCUA’s Payday Alternative Loan program, the rule does not give a blanket exemption to all credit simply because it is extended by banks or credit unions.,Banks offering DAP or any other small-dollar or short-term consumer credit should therefore keep an eye on the federal banking regulators, as well as the CFPB, for further action regarding such loans.

It is unclear exactly what changes the OCC may make to its supervisory approach under its new leadership (whether under this Acting Comptroller or a permanent one, who has yet to be confirmed).
Nominees for key posts at the FDIC and Federal Reserve are expected in the future as well.,Nonbank lenders should continue to monitor the CFPB’s activities, as the agency could propose further rules covering additional types of small-dollar credit. In addition, it will be important to stay aware of the activities of state and local authorities, in particular regarding any additional steps they may take to further regulate loans not covered by the CFPB’s final payday rule.

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