October 5, 2017

CFPB Imposes Stricter Rules for Payday Lending

Steven Lofchie Commentary by Steven Lofchie

The Consumer Financial Protection Bureau ("CFPB") adopted its "Payday, Vehicle Title, and Certain High-Cost Installment Loans" rule, which is intended to eliminate "Payday Debt Traps" by way of "ability-to-repay protections." The rule will apply to payday, auto title and balloon payment loans ("covered loans"), each of which covers small-dollar amounts due in full by the borrower's next paycheck (see also Fact Sheet explaining final rule).

The rule is intended to limit loans that obligate consumers to repay all or most of the debt at once. It prohibits lenders from making covered loans without determining whether consumers have the ability to repay these loans and requires lenders to conduct a "full-payment test," which is used to ascertain borrower affordability. The rule also requires lenders to perform income verification and estimate living expenses for consumers, and includes a "cooling-off period," which prevents lenders from making high-risk loans to consumers in quick succession.

The final rule does exempt certain loans from the full-payment test if they allow for the more gradual payment of debt. In accordance with the "principal-payoff option," consumers are able to (i) repay a loan in full through a single payment, or (ii) take up to two additional loans in which principal is steadily paid down. To qualify for the principal-payoff option, loans cannot exceed $500, and lenders must adhere to certain restrictions and disclosure requirements meant to limit risk.

The final rule also requires lenders to give written notice to consumers before attempting to withdraw funds from their accounts in order to satisfy a debt. These notices must include the timing, methodology and amount of the planned withdrawal. After two straight unsuccessful attempts to debit an account, the lender is not allowed to make any further attempt unless specifically authorized by the consumer.

The main provisions of the final rule will become effective 21 months after their publication in the Federal Register.


This rule is, undoubtedly, motivated by virtuous intentions. That does not necessarily mean that it will have a good result or will be experienced as helpful by its intended beneficiaries. One can reasonably guess that an effect of the rule will be to drive up the cost of payday loans or effectively to prohibit a good number of such loans. That might have a good result, akin to discouraging people from buying cigarettes. Or it might have a bad result, making it impossible for those who really need a loan to obtain one. Or else forcing them to borrow in a more "informal" market.

In any case, the CFPB ought not to assume that because the agency and its director and its employees are well-intentioned that the effects of the agency's rules are good. For example, the agency should (i) monitor the costs of credit before and after the rule adoption, (ii) measure the availability of credit and (iii) try to learn what potential borrowers do when they are denied credit from a regulated entity.

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