• CFPB Releases Payday Loan Rule
  • November 24, 2017 | Author: Christopher R. Rahl
  • Law Firm: Gordon Feinblatt LLC - Baltimore Office
  • On October 5, 2017, the Consumer Financial Protection Bureau (CFPB) released its long-awaited “payday” loan rule in a 1,690 page release. The rule targets certain short-term “payday” loans, and certain longer-term vehicle title and high-cost consumer installment loans and open-end credit plans. The final rule applies to “covered loans” that are either closed-end or open-end extensions of credit to a consumer for personal, family, or household purposes that: (1) must be substantially repaid within 45 days of consummation/advance; (2) must be substantially repaid more than 45 days after consummation/advance through at least one payment that is more than twice as large as any other payments; or (3) has an Annual Percentage Rate greater than 36% and the lender obtains a “leveraged payment mechanism.” The rule defines “leveraged payment mechanism” to include: (a) a loan agreement that provides that a borrower (at some point in the future) must authorize the lender or a service provider to debit the borrower’s deposit account on a recurring basis; (b) a loan agreement that provides that in the event of default a borrower must authorize the lender or a service provider to debit the borrower’s deposit account on a one-time or a recurring basis; and (c) any authorization where the lender obtains the ability to initiate a transfer from a borrower’s deposit account (either on a one-time or recurring basis). Examples in the commentary to the rule include: checks or other instruments written by the borrower, auto-debit authorizations, remotely created checks/payment orders, and transfers initiated by a lender that is also the depository holding the borrower’s deposit account. There are carve-outs from the “leveraged payment mechanism” definition for “single immediate payment transfers” that are initiated at a borrower’s request. This would cover a written debit authorization that is provided by a borrower for a one-time payment that is processed within 1 day of when the borrower provides it. This would also appear to cover a pay by phone debit authorization that is processed within 1 day of when the borrower provides it. In addition, carve-outs from the “covered loan” definition include: purchase money loans to finance motor vehicles/goods; home mortgage loans; credit cards; student loans; non-recourse pawn loans (where the consumer has no possession of the pawned goods); overdraft lines of credit; wage advance loans (only for accrued wages); no-cost advances; payday alternatives (following specified parameters); accommodation loans; and business-to-business loans. The rule imposes requirements on lenders to determine a borrower’s ability to repay certain covered loans to verify that the borrower will be able to meet the loan terms and still meet basic living expenses (both during the term of the covered loan and for 30 days after the highest payment on the covered loan). Lenders must verify income and major financial obligations of a borrower and estimate basic living expenses. The rule also caps the number of shorter-term covered loans that can be made in rapid succession at three. In addition, the rule requires lenders to submit specified periodic reporting to the CFPB, provide certain notices before debiting payments from a consumer’s deposit account, and requires lenders to obtain new debit authorizations after two failed debit attempts or if any payment amount or timing changes. The rule takes effect 21 months after it is first published in the Federal Register (resulting in a likely effective date in August or September of 2019). Please contact Christopher Rahl for questions concerning the new rule.