CFPB rule requires payday lenders to apply “repayment capacity” standard to loans
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Today, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) released a new rule that will have a significant impact on the payday loan market. The CFPB will now require lenders to perform a “full payment test” to determine in advance whether the borrower will have the capacity to repay the loan as it falls due. Lenders can skip this test if they offer a “principal repayment option”. The new rule also limits the number of times a lender can access a borrower’s bank account.
The new rule covers loans that require consumers to pay off all or most of the debt at once, including payday loans with 45-day repayment terms, auto title loans with credit terms. 30 day deposit advance products and longer term lump sum loans. . The CFPB claims that these loans lead to a “debt trap” for consumers when they cannot afford to repay them. “Too often borrowers who need cash quickly find themselves trapped in loans they cannot afford,” CFPB director Richard Cordray said in a statement.
Payday loans are usually for small amounts and require full repayment before the borrower’s next paycheck. The lender charges fees and interest that the borrower must repay when the loan matures. Auto title loans work the same way, except that borrowers put their vehicles as collateral. As part of the loan, borrowers authorize the lender to electronically debit funds from their checking account at the end of the loan term.
The full payment test
Under the new rule, lenders must now determine whether the borrower can make the loan payment while meeting basic living expenses and other major financial obligations. For payday loans and auto loans due in one lump sum, the test requires that the borrower can afford to pay the full loan amount, including finance charges and charges, within two weeks or more. ‘a month. For longer term lump sum loans, lenders should assess whether the borrower can afford the monthly payments with the highest total payments on the loan.
In addition, the rule limits the number of short-term loans a lender can make to a borrower in quick succession to three. Likewise, lenders cannot issue loans with flexible repayment plans if a borrower has short term or lump sum loans pending.
Capital repayment option
Lenders can avoid the full payment test on some short term loans up to $ 500. To benefit from this exemption, the lender can offer up to two extensions, but only if the borrower repays at least one third of the initial capital each time. A lender cannot offer these loans to a borrower with recent or current short term or lump sum loans. This option is not available for auto title loans.
Account debit limits
The new rule also limits the number of times a lender can access a borrower’s bank account. After two unsuccessful attempts, the lender can no longer debit the account without reauthorizing the borrower.
The Bureau has excluded from the rule certain loans that it believes are less risky. It excludes lenders who make 2,500 or fewer short-term or lump-sum loans per year and do not derive more than 10% of their income from these loans.
This new rule will come into effect 21 months after its publication in the Federal Register.
Payday lenders should immediately start putting in place revised compliance procedures for how they qualify borrowers. Otherwise, they could find themselves in violation of the rule.