OVERVIEW OF LENDER RULES
The Consumer Financial Protection Bureau (CFPB) released a final ruling to take effect January 18, 2018. This final ruling creates new lender rules. Payday loans, auto title loans, and deposit advances are all affected. Also, the new lender rules affect longer-term loans with balloon payments. The rule’s aim is to prevent consumers from falling into debt traps when they fail to repay their loans in full.
“More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter. And nearly one-in-four initial payday loans are re-borrowed nine times or more, with the borrower paying far more in fees than they received in credit. As with payday loans, the CFPB found that the vast majority of auto title loans are re-borrowed on their due date or shortly thereafter.” – 2017 CFPB Fact Sheet on Payday Loans
DETAILS ABOUT NEW LENDER RULES
The rule establishes “Ability-to-Repay Protections” that prevent debt traps. Prior to being able to lend, lenders must assess a borrower’s ability to repay the principal loan balance in full. These protections include:
Full-payment tests
Lenders must use borrower’s income and living expenses information to determine borrower’s ability to afford loan payments along with basic living expenses and major financial obligations.
Principal pay-off options for some short-term loans
For some short-term loans of $500 or less, borrowers do not need to pass the full-payment test. The CFPB outlines rules to limit the number of short-term loans a borrower can have within specific time durations.
Less risky loan options
Usually, community banks or credit unions make 2,500 or fewer covered short-term or balloon-payment loans per year. They derive no more than 10 percent of revenues from such loans. Qualifying institutions that offer small personal loans do not have to adhere to the full-payment test.
Penalty fee prevention
The CFPB created the debit attempt cut-off for short-term loans and balloon-payment loans. Also, the debit attempt cut-off concerns longer-term loans with an APR over 36 percent. The debit attempt cut-off includes authorization for the lender to access the borrower’s checking or prepaid account.
Additionally, after a lender makes two unsuccessful debit attempts to the borrowers account, lenders are not authorized to attempt a third unless they receive new authorization from the borrower. Lenders must also provide borrowers with written notice before the first account debit effort to collect on an unpaid loan balance.
Sources: CFPB Final Rule; CFPB Finalizes Rule To Stop Payday Debt Traps; CFPB Fact Sheet Payday Loans
Further, to learn more about the CCCS and lender rules, click here.