Fact Sheet Summary: CFPB Final Rule Re: Payday, Vehicle Title and Certain High-Cost Installment Loans

12 CFR Part 1041

NASCUS Legislative & Regulatory Affairs Department
October 2017

The Consumer Financial Protection Bureau (Bureau or CFPB) is issuing a final rule establishing 12 CFR 1041, which governs the underwriting of covered short term and longer-term balloon payment loans including payday and vehicle title loans.  The rule also contains disclosure and penalty fee prevention requirements for covered short-term loans, covered longer-term balloon payment loans and certain high-cost covered longer-term loans.  The rule provides exemptions from the underwriting criteria for certain loans that have specific consumer protections in place.  Finally, the Bureau is not finalizing the “ability to repay” requirements for certain high-cost installment loans that were featured in the payday loan proposed rule.

The majority of the final rule will become effective 21 months after publication in the Federal Register.  Section 1041.11 (“Registered Information Systems”) becomes effective 60 days after publication in the Federal Register.

This document summarizes the accompanying Payday Final Rule Fact Sheet which can be found here. The Final Rule can be found here.  

Summary

Loans Covered

The final rule applies to two types of “covered loans:”

  • Short-term loans (i) with terms of 45 days or less, including 14-day and 30-day payday loans and (ii) that are vehicle title loans and are usually made for 30 days terms; and
  • Longer-term balloon payment loans

The “ability to repay” protections apply to loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products and longer-term loans with balloon payments.

The penalty-fee prevention measures apply to short-term loans, balloon payment loans, and any loan with an annual percentage rate over 36 percent that gives the lender account access. 

Certain types of consumer credit are exempted or excluded from coverage under the rule:

  • Loans extended solely to finance the purchase of a car or other consumer good in which the good secures the loan;
  • Home mortgages and other loans secured by real property or a dwelling if recorded or perfected;
  • Credit cards;
  • Student loans;
  • Non-recourse pawn loans;
  • Overdraft services and lines of credit;
  • Wage advance programs;
  • No-cost advances; and
  • Alternative loans (loans similar to those offered under NCUA’s PAL program).

Covered Lenders

All lenders that regularly extend credit are subject to the CFPB’s requirements for any loan they make that is covered by the rule including banks, credit unions, non-banks and their service providers.  Lenders are required to comply with the rule regardless of whether they operate online or out of storefronts and regardless of what state license they may hold.

Underwriting Requirements:

The final rule requires lenders to conduct a “full-payment test” to determine upfront a borrower’s ability to repay the loan.

  • For payday and auto title loans that are due in one lump sum, “full payment” means being able to afford the total loan amount plus fees and finance charges within two weeks or a month. For short term loans, lenders are required to determine that the borrower has sufficient income to pay the loan and meet major financial obligations and basic living expenses during the term of the loan and for 30 days after paying off the loan.  Lenders can also take into account income of household members, if the borrower has verified they have access to the income and shared payment of major financial obligations and basic living expenses.
  • 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. For such loans, lenders are required to ensure a borrower can pay all of the payments when due, including the balloon payment, as well as major financial obligations and basic living expenses during the term of the loan and for 30 days after making payments during the month with the loan’s highest payment.
  • The final rule also imposes a mandatory 30-day cooling off period after the third covered short term or longer-term balloon payment loan in quick succession.

Loans exempted from the “full-payment” test

Principal-payoff option for certain short term loans

  • The rule permits lenders to skip the full payment test for certain short-term loans if they offer a “principal payoff option.” This option would be available for short-term loans of up to $500 that are structured to allow the borrower to pay off the debt more gradually.  Under this option, the consumer can either repay the loan in a single payment or have up to two subsequent loans where the principal is steadily paid down.  Parameters for the principal-payoff option include:    
    • Restricted to lower-risk situations –
      • Consumers can borrow no more than $500 for the initial loan;
      • lenders cannot use an auto title as collateral or structure the loan as open-end credit;
      • lenders cannot offer the principal payoff option for consumers who have recent/outstanding short-term or balloon payment loans;
      • lenders cannot make more than three such loans in quick succession; and
      • loans cannot be made under this option if the consumer has already had more than six short-term loans or been in debt for more than 90 days on short-term loans over a rolling 12-month period.
    • Debt is paid off – The lender can offer a borrower up to two additional loans but only if the borrower pays off at least 1/3 of the original principal with each extension.  This reduction requirement is intended to steadily reduce the consumer’s debt burden.
    • Debt risks are disclosed – lenders are required to provide notice advising consumers about the elements of the principal payoff option before providing making a loan under this option.

Loans exempted from the “full-payment” test and the “principal payoff option”

“Less Risky Loan Options”

  • These loans would be exempted from the full-payment test and the principal payoff option.
    • Loan made by a lender that makes 2500 or fewer covered short-term or balloon payment loans per year and derives no more than 10% of its revenue from such loans
    • Loans that meet the parameters of NCUA’s “payday alternative loans” or PALS, which are low-cost loans which cannot have a balloon payment and that have strict limitations on the number of loans that can be made over six months.
    • Certain no-cost advances and advances of earned wages made under a wage advance program are also exempted under the final rule.

Additional Requirements under the Final Rule

  • Reporting Requirements – the rule requires lenders to use credit reporting systems registered by the Bureau to report and obtain information about loans made under the full payment test or principal payoff option.  Lenders are required to report basic loan information and updates to that information. There are exceptions provided to this requirement when registered information systems are not available. 
  • Penalty-fee prevention- the rule includes payment withdrawal limitations to short-term loans, balloon payment loans and any loan with an annual percentage rate over 36 percent that includes an authorization that permits the lender to access the borrower’s checking or prepaid account.  The rule’s limitations include:
    • Written notice – lenders are required to provide consumers written notice before the first attempt to debit the consumer’s account to collect payment for any loan covered by the rule. If there are changes to the debit (amount, timing and payment channel), the consumer must be alerted to the changes.
    • Debit cutoff – lenders are prohibited from debiting a consumer’s account after two “straight” unsuccessful attempts to collect payment unless the lender obtains a new authorization from the consumer to debit the account again.
    • The withdrawal limitations will not apply to banks/credit unions that make loans to their own consumers if those loans cannot generate overdraft or insufficient funds fees.

Preemption

  • The final rule sets minimum federal standards for the regulation of covered loans and is designed to act as a floor and not a ceiling with regard to regulation in this area.  The Bureau intends for the federal law to coexist with State laws pertaining to covered loans.
  • Persons subject to the final rule are required to comply with the requirements of this rule and any applicable State laws, except where applicable State laws are inconsistent with the final rule. 
  • The Bureau declined to determine if particular State statutes, regulation, etc. were inconsistent with the final rule and noted that specific preemption questions should be decided “upon application” in accordance with Section 1041(a)(2) of Dodd Frank.