CFPB Finalizes Rule Restricting Payday Lending

10/05/17 – The Consumer Financial Protection Bureau (CFPB) finalized a rule aimed at limiting recurring debt from payday lending by requiring lenders to determine upfront whether consumers can afford to repay their loans.

In addition to payday loans, the new rule covers auto-title loans, deposit-advance products offered by banks, and longer-term loans with large one-time payments known as “balloon payments.” However, the rule excludes most types of longer-term consumer loans of over 45 days. The new rule will also place restrictions on roll over loans.

Under the new rule, before lending, lenders must conduct a “full-payment test” to determine whether borrows can afford to pay back the loan without reborrowing. However, 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. The rule requires lenders to use credit reporting systems registered by the CFPB to report and obtain information on certain loans covered by the proposal.

The specific restrictions under the rule include:

• Full-payment test:  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.
• Principal-payoff option for certain short-term loans: 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. For example, those needing more time to repay, lenders may offer up to two extensions, but only if the borrower pays off at least one-third of the original principal each time.
• Less risky loan options: Less risky loans do not require the full-payment test or the principal-payoff option. This includes 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.  Additionally, the rule does not cover loans that generally meet the parameters of “payday alternative loans” authorized by the National Credit Union Administration.
• Debit attempt cutoff: After two straight unsuccessful attempts, the lender cannot debit the account again unless the lender gets a new authorization from the borrower. The lender must give consumers written notice before making a debit attempt at an irregular interval or amount.

The final rule does not apply ability-to-repay restrictions to all of the longer-term loans that would have been covered under the proposed rule.

CFPB Press Release; Final Rule; Fact Sheet.