Insights

The payday and installment loan industries have long-anticipated the Consumer Financial Protection Bureau to issue rules that would impact how consumers access short-term, high-rate credit. In March, the CFPB released a proposal that outlines what its ideas are for future proposed rules in this area. The CFPB's proposal intends to apply to the following product lines, representing a surprisingly broad coalition of creditors now united in their common goal to oppose the most disruptive aspects of the proposal:

• Payday loans: Payday loans typically are structured as single-payment, short-term loans with repayment due at the time of the consumer's next paycheck or benefit payment.
• Deposit advance products: Deposit advance products allow a depository institution to automatically collect payment on the advance from the borrower's incoming qualifying electronic deposits. Both the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued guidance in November 2013 that virtually eliminated these products. To the extent that depository institutions may offer replacement products, those products may be subject to the CFPB's proposals under consideration.
• Vehicle title loans: Vehicle title loans are secured by a lien on the consumer's vehicle. Title loans may be short-term or longer-term, and the lender may repossess the consumer's vehicle if the consumer is unable to pay.
• High-cost installment loans: Installment loans have multiple payments, often over several months, and have loan amounts ranging from a hundred dollars to several thousand dollars. They carry interest rates that exceed 36% per year or have balloon payments.
• Open-end lines of credit and other loans: Open-end lines of credit and other loans that fall within the CFPB's proposal under consideration, regardless of how they are named or marketed to consumers, would also be covered. A few states, such as Kansas and Virginia, have open-end credit markets due to more favorable interest rates for lenders on that kind of credit.
• Other: The term "high-cost installment loans" potentially captures any longer-term loan where the lender has the ability to seek repayment from a consumer account and the annual percentage rate exceeds a specific, but not yet established, "all-in" threshold (as noted above, 36% per year). This term potentially covers all loans where a consumer repays the loan through electronic funds transfers. All online lenders obtain repayment through electronic funds transfers (consistent with the Electronic Funds Transfer Act), and many storefront lenders do as well. Student loans and credit cards are also captured by the proposal.

The proposed rules fall into three buckets: proposed rules for so-called "short-term loans," proposed rules for "longer-term loans," and collection rules applicable to both.

Covered short-term loans are loans that require consumers to pay back the loan in full within 45 days. Many short-term loans are for 14 days or one month to match the timing of consumers' paychecks. However, loans taken out shortly before a consumer is paid may not be due until the following paycheck. The 45-day definition would capture these slightly longer loans. Covered short-term loans include payday loans with a single payment, vehicle title loans, open-end lines of credit, and installment loans, so long as the contractual duration is 45 days or less. Unless expressly excluded, covered short-term loans include consumer loans with a contractual duration of 45 days or less, regardless of how the lender characterizes the loans or the nature of the state statute authorizing the loans. The CFPB is proposing that creditors that extend short-term loans either comply with an "ability-to-repay" rule OR offer only loans with specific features and limited "screening." The CFPB, alternatively, may require the ability to repay even on loans with specific features. The ability to repay rules, and limitations on the number of extensions, pose significant challenges for many lenders, who currently operate under state lending laws that authorize more extensions than contemplated by the CFPB.

Covered longer-term loans are loans with an "all-in" annual percentage rate that exceeds 36% per year where the lender obtains (1) access to repayment through a consumer's account or paycheck or (2) a non-purchase money lien on the consumer's vehicle. The definition of "longer-term loans" is broad enough to capture virtually all kinds of credit, including student loans and credit cards, so long as there is access to repayment through a customer's account or paycheck and the all-in APR exceeds 36% per year. The CFPB's proposals would require lenders to take steps to determine that borrowers are able to repay their debt. Just as with short-term loans, lenders would have two alternative ways to meet this "ability-to-repay" requirement. Specifically, lenders making covered longer-term loans would have to adhere to certain requirements.

Finally, the proposal targets the ability of all creditors that originate covered short-term and longer-term loans to access a consumer's checking, savings, or prepaid account to collect payment through a variety of methods, including post-dated checks, debit authorizations, or remotely created checks.

Lenders would have to provide consumers with a notice at least three business days in advance of each payment collection attempt, including an attempt to re-present a failed payment, against the consumer's bank, credit union, or prepaid account. Additionally, under the proposals being considered, if two consecutive attempts to collect money from the consumer's account are unsuccessful, the lender would not be allowed to make any further attempts to collect from the account unless the consumer provided a new authorization.

We anticipate that the CFPB will promulgate this rule sometime in the fall, and it will be subject to notice-and-comment rulemaking.

Catherine M. Brennan is a partner in the Hanover, Maryland office of Hudson Cook, LLP. Cathy can be reached at 410-865-5405 or by email at cbrennan@hudco.com.