April 22, 2015
Since January 2012, the U.S. Consumer Financial Protection Bureau (CFPB) has been closely studying the market for payday loans and related products. It has issued a white paper on payday loans and deposit advance products, and its Office of Research has released a "data point" relating to how frequently payday loan customers take out series of subsequent loans. And earlier this spring, the CFPB released an outline of proposals under consideration for regulation of the industry generally pursuant to its authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), signaling an effort to reform the types of loan products that may be offered to consumers. In this Alert, we discuss the CFPB’s efforts on payday lending to date.
I. 2013 White Paper on Payday Loans and Deposit Advance Products
In April 2013, the CFPB issued a white paper on Payday Loans and Deposit Advance Products (White Paper) that summarized its initial data findings and concerns about the industry. Although the majority of the White Paper is devoted to a detailed description of the markets for payday loans and deposit advance products, the CFPB also provided an overview of its concerns, which included the following:
In the White Paper’s conclusion, the CFPB stated that "the potential consumer harm and the data gathered to date are persuasive that further attention is warranted to protect consumers." Furthermore, the CFPB expressed a desire "to continue its inquiry into small dollar lending products to better understand the factors contributing to the sustained use of these products" and to assess "the effectiveness of limitations in curbing sustained use."
Following the issuance of the White Paper, the CFPB released its rulemaking agenda for 2014, which listed pre-rulemaking for payday lending and deposit advance products as slated to begin in March 2014. The CFPB stated that it was considering what rules would be appropriate for addressing the sustained use of short-term, high-cost credit products, including additional disclosures and regulations to address unfair, deceptive or abusive acts or practices (UDAAP).
II. CFPB Office of Research Data Point on Payday Lending Loan Sequences
In March 2014, the CFPB’s Office of Research released a data point focusing on "loan sequences," which it defined as an initial payday loan plus the series of subsequent loans that are renewed within 14 days of repayment of a prior loan. The study used data obtained from a number of storefront payday lenders and included over twelve million loans in thirty states covering twelve-month windows in 2011 and 2012. The Office of Research stated that, according to its review of the data:
III. CFPB’s 2015 Proposals on Payday Lending Regulation
A little over a year later, on March 26, 2015, the CFPB announced that it is considering proposing regulations on payday loans, deposit advance products, vehicle title loans, high-cost installment loans and certain open-end loans pursuant to its authority under Sections 1031 and 1032 of the Dodd-Frank Act. These sections allow the CFPB to issue rules:
As a part of its pre-rulemaking process, the CFPB published an Outline of Proposals Under Consideration and Alternatives Considered for the Small Business Advisory Review Panel for Potential Rulemakings for Payday, Vehicle Title, and Similar Loans (Outline of Proposals).
Under Section 1100G of the Dodd-Frank Act, the CFPB is required to convene a Small Business Review Panel consisting of representatives from the CFPB, the Small Business Administration (SBA) and the Office of Management and Budget’s Office of Information and Regulatory Affairs when working on a rule that could have significant economic effects on small businesses.
The CFPB coordinates with the SBA to select between fifteen and twenty small businesses to provide feedback on the regulatory proposals including anticipated compliance requirements and potential costs of the proposed rules. Within sixty days of the panel’s meeting, it will complete a report including any significant alternatives aimed at minimizing adverse economic effects, which will be published by the CFPB along with a proposed rule as the next step in the rulemaking process.
The proposed regulations under consideration would (i) require lenders to take action to ensure that consumers can repay their loans, (ii) restrict lenders from collecting payment from consumers in ways that tend to create fees deemed excessive by the CFPB, and (iii) require lenders offering covered products to create and maintain policies and procedures related to record-keeping and ensuring compliance with the regulations. These proposed regulations, which are intended to create a "federal floor for consumer protection for covered loans," are discussed in further detail below.
A. Avoiding Long-Term Debt
Under the approaches being considered, the CFPB would seek to ensure that consumers can promptly repay two separate types of credit products: (i) short-term loans that consumers are required to pay back in full within 45 days (Short-Term Loans), which would include most payday loans, deposit advance products and some open-end lines of credit and vehicle title loans, and (ii) "high-cost, longer-term" credit products of more than 45 days where the lender can access repayment from the borrower’s depository account, or hold a security interest in a vehicle, and the all-inclusive annual percentage rate is more than 36 percent (High-Cost, Long-Term Credit Loans), which would include some high-cost installment loans, longer-term vehicle title loans and similar open-end products.
For both Short-Term Loans and High-Cost, Long-Term Credit Loans, the CFPB has proposed two regulatory alternatives: either (i) conduct an ability-to-repay determination or (ii) comply with a set of screening and structural requirements. Under the CFPB’s approach, lenders will be required to satisfy one of the alternatives prior to offering the loan. The CFPB believes that providing lenders with the opportunity to comply with a set of screening and structural requirements will reduce the costs of compliance for lenders and provide an alternative arrangement for small lenders that may have difficulties conducting ability-to-repay determinations.
Under this approach, the proposals would not cover the following products:
1. Short-Term Loans
Under the CFPB’s approach, lenders offering Short-Term Loans would be required to either (i) conduct an ability-to-repay determination prior to offering the loan or (ii) adhere to certain screening and structural requirements designed to prevent the sustained use of Short-Term Loans. These options are outlined in further detail below.
i. Ability-to-Repay Requirements
ii. Screening and Structural Requirements
iii. Alternatives Considered
The CFPB stated that it had considered, but rejected, the following approaches due to the burdens imposed on small lenders and the potential for flexible determinations to provide a more meaningful assessment of ability-to-repay:
The CFPB also rejected an approach that would only impose limitations on loan sequences without requiring lenders to make an ability-to-repay determination, believing that this approach failed to provide adequate protections for potential borrowers.
2. High-Cost, Long-Term Credit Loans
Similar to the proposed regime for Short-Term Loans, lenders offering High-Cost, Long-Term Credit Loans would be required to either (i) conduct an ability-to-repay determination prior to offering the loan or (ii) adhere to certain screening and structural requirements designed to prevent the sustained use of High-Cost, Long-Term Credit Loans. The CFPB has noted that it is considering treating long-term loans with balloon payments in the manner outlined above for Short-Term Loans.
i. Ability-to-Repay Requirements
ii. Screening and Structural Requirements
The CFPB is considering two approaches for the screening and structural requirements. Under either alternative, the lender must verify the potential borrower’s income, borrowing history and report the use of the loan to all applicable commercially available reporting systems. Further, the length of the loan must be between 45 days and six months.
(a) The loan principal must be between $200 and $1,000, and fully amortize over no fewer than two payments.
(b) The lender cannot charge an interest rate higher than 28 percent and an application fee, reflecting the actual costs, of more than $20.
(c) The potential borrower must have no other covered loans outstanding, and the loan must result in the potential borrower having no more than two loans during a rolling six-month period.
(a) The loan must be a closed-end loan payable in at least two substantially equal payments.
(b) The borrower must have no other covered loans outstanding, and the monthly payment on the loan must be no more than 5 percent of the borrower’s expected gross monthly income.
(c) The lender cannot charge fees for prepayment of the loan.
(d) The borrower must not have defaulted on any High-Cost, Long-Term Credit Loans in the last 12 months or have any other High-Cost, Long-Term Credit Loans outstanding. Further, the loan must not result in borrower taking out more than two High-Cost, Long-Term Credit Loans in a rolling 12-month period.
iii. Alternatives Considered
Similar to Short-Term Loans, the CFPB considered, but rejected, approaches prohibiting lenders from making loans based on borrowers’ residual income levels and portfolio default and re-borrowing rates due to the burdens imposed on small lenders and the potential, in its view, for flexible determinations to provide a more meaningful assessment of ability-to-repay.
B. Payment Collection Practices
The CFPB stated that it was also considering requiring lenders to provide written notice to borrowers before accessing deposit accounts. Prior to accessing a borrower’s checking, savings or prepaid account, lenders would be required to provide borrowers with three business days’ advance written notice detailing key information about the upcoming payment collection attempt including an exact break-down of the payment amount and date of collection attempt, payment channel, contact information for the lender and loan balance remaining. The CFPB stated that it was considering allowing lenders to provide notice either through the mail or electronically to reduce the compliance costs associated with the proposed regulations.
The CFPB is also considering proposing regulations to limit repeated attempts to collect payment to reduce the possibility of excessive fees being charged to the borrower. If a lender makes two consecutive unsuccessful attempts to collect from a borrower’s account, the lender would be prohibited from making any further attempts until the consumer provides a new authorization. This is designed to limit the fees borrowers are charged in the event of unsuccessful attempts on their checking, savings or prepaid accounts.
C. Compliance and Record-Keeping
Finally, the CFPB stated that it was considering regulations to require lenders (i) to institute and maintain policies and procedures to reasonably designed to ensure compliance with the proposals outlined above and (ii) to retain records related to Short-Term Loans and High-Cost, Long-Term Credit Loans for 36 months after the last action on the applicable loan. The record-keeping procedures would also include annual reports detailing defaults, re-borrowing and loans made under each alternative discussed above.
D. Effects on Payday Lenders
Based on simulations, the CFPB believes that, due to the greater costs of determining the ability of borrowers to repay a loan, it is likely that lenders making Short-Term Loans will primarily make use of the structural and screening requirements, which would have substantial impacts on revenue, with lenders that specialize in payday lending being the most severely affected. Further, the CFPB finds that the proposals could lead to lenders diversifying their product offerings, and substantial consolidation in the short-term payday lending market, particularly in those markets where diversification is very difficult.
The CFPB is still seeking insight into the effect that the regulations would have on lenders of High-Cost, Long-Term Credit Loans, but finds that the costs of using the screening and structural requirements would likely reduce operational costs associated with determining a borrower’s ability to repay a loan.
As noted above, the CFPB has published the Outline of Proposals in preparation for a panel that will gather feedback from small lenders on the effects of the proposed regulations under consideration. Upon completion of the panel, the CFPB may be expected to issue proposed regulations, on which the public will be invited to submit comments prior to the issuance of the final regulations.
Given the CFPB’s interest in the payday lending industry and the stringency of the proposed approaches discussed above, it is likely that the CFPB’s proposed regulations will subject lenders to increased regulatory compliance costs and reduce their ability to offer many current products. This in turn will raise questions about the extent of the CFPB’s legal authority under the UDAAP provisions of Dodd-Frank, as well as the likely market effects of restrictions on current lending practices for borrowers who are not likely to become mainstream banking customers.
 Consumer Financial Protection Bureau, Payday Loans and Deposit Advance Products: A White Paper of Initial Data Findings, at 4 (Apr. 24, 2013).
 Consumer Financial Protection Bureau, Small Business Advisory Review Panel for Potential Rulemaking for Payday, Vehicle Title, and Similar Loans: Outline of Proposals Under Consideration and Alternatives Considered, at 4 (Mar. 26, 2015).
Gibson, Dunn & Crutcher’s Financial Institutions Practice Group lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact any member of the Gibson Dunn team, the Gibson Dunn lawyer with whom you usually work, or the following:
Michael D. Bopp – Washington, D.C. (+1 202-955-8256, firstname.lastname@example.org)
Arthur S. Long – New York (+1 212-351-2426, email@example.com)
Brian E. O’Keefe – New York (+1 212–351–2446, firstname.lastname@example.org)
Jeffrey L. Steiner - Washington, D.C. (+1 202-887-3632, email@example.com)
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