At the start of the week, the CFPB ad a final rule covering small dollar loans that repeals the mandatory underwriting provisions of the Payday Loan Rule 2017. The 2017 Payday Loan Rule is the result of an earlier CFPB initiative, led by former CFPB director Richard Cordray, which appears to have been developed following the CFPB’s publication of a white paper April 24, 2013. The white paper summarized the findings of the CFPB’s analysis of payday loans and deposit advance products. In the white paper, the CFPB concluded that “these products can become harmful to consumers when used to alleviate chronic cash shortages. We find that a significant portion of payday loan and deposit advance loan users are doing long-term transactions, which suggests that they are not able to fully repay the loan and pay for other expenses without take out a new loan soon after. To remedy this, the CFPB issued a Notice of proposed regulations in June 2016, then the final payday loan rule on October 5, 2017, which had two main parts.
- For short and long term loans with lump sum payments, the Bureau said it would be unfair and abusive for a lender to grant such loans without reasonably determining that consumers have the ability to repay the loans on their terms. . Therefore, the 2017 Payday Loan Rule generally required that before granting such a loan, a lender reasonably determine that the consumer has the ability to repay the loan, thereby creating mandatory underwriting provisions.
- For the same set of loans and for longer term loans with an annual percentage rate greater than 36% that are repaid directly from the consumer’s account, the 2017 payday loan rule stated that this would be a unfair and abusive practice of attempting to withdraw payment from a consumer’s account after the failure of two consecutive payment attempts, unless the lender obtains new and specific authorization from the consumer to make further withdrawals from the account.
This week’s rule amends 12 CFR § 1041 by removing mandatory underwriting provisions along with related definitions, reporting and record keeping requirements. This repeal is timely, as the planned implementation of these parts of the 2017 payday loan rule has been delayed until November of this year. It should be noted that while the new changes effectively remove several key limits on payday lenders, the CFPB has chosen to retain automatic payment protections. The full red line of 12 CFR § 1041 can be found here.