The Consumer Financial Protection Bureau has finalized its payday lending rule, creating “strong, common-sense protections” to prevent “financially vulnerable consumers” from falling into “payday debt traps,” the bureau said.
The rule requires payday lenders to determine upfront whether the consumer is capable of repaying the loan. The rule also curtails lenders’ repeated attempts to debit payments from a borrower’s bank account, “a practice that racks up fees and can lead to account closure,” the bureau said.
Many borrowers end up repeatedly rolling over or refinancing their loans, each time accumulating new charges. More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter, the CFPB said.
The rule applies to loans that require consumers to repay all or most of the debt at once. Under the new rule, lenders must conduct a “full-payment test” to determine up front that borrowers can afford to repay their loans without re-borrowing. It also requires lenders to use credit reporting systems registered by the bureau to report and obtain information on certain loans covered by the proposal.
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 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 an annual percentage rate higher than 36 percent that includes authorization for the lender to access the borrower’s checking or prepaid account.
“Loans like these are heavily marketed to financially vulnerable consumers. Though they offer cash-strapped consumers access to credit, the full-payment requirement can make these loans unaffordable,” said CFPB Director Richard Cordray. “Ultimately, we believe this rule will allow for responsible lending while ensuring people are not saddled with unaffordable loans that undermine their financial lives.”
The final rule does not apply ability-to-repay protections to all of the longer-term loans that would have been covered under the proposal. The CFPB is conducting further study to consider how the market for longer-term loans is evolving.
OCC fact-checks CFPB arbitration claims
The Office of the Comptroller of the Currency has released a report challenging the CFPB’s interpretation of an arbitration study.
The CFPB proposed its final version of the rule banning mandatory arbitration agreements – which applies mostly to consumer financial products like credit cards – in July.
Economists from the OCC examined a study used by the CFPB to support their claims that banning such clauses would have a low impact on credit costs. The CFPB didn’t find “any statistically significant evidence of increases in the cost of credit to consumers associated with banning mandatory arbitration,” the OCC said.
The OCC report, however, says “the data, analysis, and results … indicate a strong probability of a significant increase in the cost of credit cards as a result of eliminating mandatory arbitration clauses.”
The exact size of that increase is uncertain, the OCC said, but there is a high probability that the total cost of credit will increase, with an expected increase of 3.43 percentage points. There is an 88 percent chance the total cost increases as a result of the final rule, and a 56 percent chance that costs will increase by 3 percentage points or more, the OCC said.
Both the OCC and the CFPB analyses were based on a working paper published on SSRN.com by Alexei Alexandrov, “Making firms liable for consumers’ mistaken beliefs: theoretical model and empirical applications to the U.S. mortgage and credit card markets.”