The Bureau of Consumer Financial Protection (CFPB) recently released final regulations for short and long term loans with lump sum payments (like payday loans). Lenders will be required to reasonably determine that consumers have the capacity to repay loans. In addition, for these loans, as well as longer term loans with an APR greater than 36% that are repaid directly from the consumer’s account, lenders will be prohibited from attempting to withdraw payment from an account. consumer after two consecutive failed payment attempts. due to insufficient funds.
Which loans are subject to the new regulations?
The regulations generally apply to a lender who extends credit by providing “covered loans”. A “covered loan” is generally a closed or indefinite loan granted to a consumer for personal, family or household purposes, which satisfies one of the following elements: (1) the due date of the loan is within 45 days after the loan is made (“Short Term Covered Loans”); (2) the consumer is required to repay the entire balance in a single payment more than 45 days after the granting of the loan or in at least one payment which is more than twice as large as any other payment (or, in this Regarding multiple advance loans which are structured such that the required minimum payment may not fully amortize the balance by a specified date or time, the final payment amount could be more than double the amount of other minimum payments) (“Lump Sum Payment Covered Longer Term Loans”); or (3) the cost of credit exceeds 36% and the lender is authorized to withdraw payments from the consumer’s account.
Certain types of loans are excluded, in particular: (i) loans with guaranteed interest on purchase money (credit granted for the purpose of financing the purchase of goods from a consumer when they are secured by the goods purchased ), (ii) residential mortgages, (iii) credit cards, (iv) student loans, (v) overdraft services, (vi) payday advance programs and (vii) some advances free of charge.
Certain alternative loans are exempt if they meet the following requirements: (a) no credit with an indefinite duration, (b) a duration of at least 1 month and not more than 6 months, (c) the principal is not not less than $ 200 and not more than $ 1,000, (d) repayable in two or more installments, all equal in amount and at equal intervals, and the loan is fully amortized over the term of the loan, and (e) no fees are charged other than the rate and administration fees permitted for federal credit unions under applicable National Credit Union Administration regulations (12 CFR 701.21 (c) (7) (iii)). The lender must also meet certain other due diligence and documentation requirements.
Loans made by lenders who, on an annual basis, do not grant more than 2,500 guaranteed loans and in which not more than 10% of the income comes from guaranteed loans, are exempt.
How does a lender reasonably determine whether a consumer will have the capacity to repay?
For short-term covered loans and long-term covered lump sum loans, the lender must reasonably determine that the consumer will have the capacity to repay the loan in accordance with the terms of the loan. The lender must determine that, based on the estimates of the consumer’s basic living expenses and the calculation of the ratio of debt to consumer income or residual income of the consumer, the consumer can pay all significant financial obligations, perform all loan payments and meet basic living expenses for specified periods.
Lenders must obtain certain consumer certifications and perform certain other due diligence in order to meet verification requirements. Lenders cannot make short-term covered loans or long-term lump-sum covered loans if, during the period in which the consumer has a short-term covered loan or a longer-term covered loan with payment lump sum current and for 30 days thereafter, the new loan would be the fourth in a series of loans.
A short-term covered loan that meets the following requirements is not subject to this requirement: the principal amount is not more than $ 500 (or lower specified amounts for additional loans in a sequence), (x ) the loan is fully amortized over the life of the loan and the payment schedule provides for the lender to allocate a consumer’s payments over the principal outstanding and interest and charges as they accumulate only by applying a periodic interest rate fixed to the outstanding balance of the outstanding loan principal during each scheduled repayment period for the term of the loan, (y) no vehicle collateral is taken for the loan, and (z) the loan is not an open-ended loan. The lender must also meet certain due diligence and disclosure requirements. A lender cannot make a short-term covered loan or a longer-term, lump-sum covered loan during the period that a consumer has an outstanding short-term covered loan and for 30 days thereafter.
What payment transfers are prohibited?
For all covered loans, a lender cannot attempt to withdraw payment from a consumer’s account after two consecutive payment attempts from that account have failed due to insufficient funds. This prohibition does not apply if the lender obtains from the consumer the new and specific authorization to make new withdrawals from the account or if the lender executes a single immediate payment transfer at the consumer’s request, in each case subject to reservation. the satisfaction of certain requirements set out in the regulations.
If the lender is also the account holder, the transfer of funds by an account-keeping institution from a consumer account held with the same institution is not prohibited if it meets the following requirements: (A) the lender, in accordance with the terms of the loan contract or account agreement, does not charge the consumer any fees, other than late fees under the loan agreement, in the event that the lender initiates a transfer of funds from the account of the consumer under the covered loan for an amount that the account lacks sufficient funds to cover; and (B) the lender, in accordance with the terms of the loan agreement or account agreement, does not close the consumer’s account in response to a negative balance resulting from a transfer of funds initiated under the covered loan.
Before making a withdrawal from a consumer’s account for a covered loan, the lender must notify the consumer in the form and content required by regulation.
Other Lender Requirements
For each short-term covered loan and long-term lump sum loan, the lender must provide certain information to the registered information systems no later than the time the loan is made, any related updates and the time the loan is made. loan ceases to be an outstanding loan.
A lender providing secured loans must develop and follow written policies which are reasonably designed to ensure compliance with this regulation and which are appropriate to the size and complexity of the lender and to the nature and extent of the lender. loan activities.
A lender must keep proof of regulatory compliance for at least 36 months after the date a loan ceases to be an outstanding loan.
When do the regulations come into force?
The regulations will come into effect 21 months after the publication of the final rule in the Federal Register. The full version of the final regulations is available here.
Cancellation of OCC directives
In 2013, the Office of the Comptroller of the Currency (OCC) issued “Guidance on Supervisory Concerns and Expectations for Deposit Advance Products” (OCC Bulletin 2013-40). The proceeds of advances on deposits in question were the issuance of short-term loans or short-term lines of credit of a small amount that a national bank makes available to a customer whose deposit account reflects direct deposits. recurring. The OCC described its expectations of national banks for these products, which included an assessment of the customer’s repayment capacity, cooling off periods after repaying one loan before granting another loan. and periodic reassessment of client eligibility. Supposedly in light of the publication of the CFPB regulation, the OCC rescinded its guidelines, but warned that the OCC may issue guidelines in the future. The OCC press release can be found here.