A final rule requiring payday lenders and others to determine upfront whether consumers can repay their loans was issued Thursday by the Consumer Financial Protection Bureau (CFPB), covering payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments.
Under the long-awaited (and, at 1,690 pages, extensive) rule, CFPB said in a fact sheet, the bureau aims to “stop debt traps” by installing ability-to repay protections which apply to loans requiring consumers to repay all or most of the debt at once.
Under the new rule, CFPB stated, lenders must conduct a “full-payment test” to determine upfront that borrowers can afford to repay their loans without re-borrowing. For certain short-term loans, lenders can skip the full-payment test if they offer a “principal-payoff option” that allows borrowers to pay off the debt more gradually.
The rule takes effect 21 months after publication in the Federal Register, except for section 1041.11, which takes effect in 60 days (after Register publication), a smaller time window the agency said is necessary to implement the consumer reporting components of the regulation.
The rule requires lenders to use credit reporting systems registered with the agency to report and obtain information on certain loans covered by the proposal. According to the bureau, the rule allows less risky loan options, including certain loans typically offered by community banks and credit unions, to forgo the full-payment test.
The new rule also includes a “debit attempt cutoff” for any short-term loan, balloon-payment loan, or longer-term loan with account access and an annual percentage rate higher than 36% that includes authorization for the lender to access the borrower’s checking or prepaid account.
These protections, CFPB stated, are in addition to existing requirements under state or tribal laws.
“All lenders who regularly extend credit are subject to the CFPB’s requirements for any loan they make that’s covered by the rule,” the agency stated. “This includes banks, credit unions, nonbanks, and their service providers. Lenders are required to comply regardless of whether they operate online or out of storefronts and regardless of the types of state licenses they may hold.”