On June 2, 2016, the Consumer Financial Protection Bureau (the "CFPB" or the "Bureau") released a 1,340-page Notice of Proposed Rulemaking on short-term lending (the "Proposal"). Our initial, high-level observations on the Proposal, which we continue to analyze, are set forth below.
The Proposal, among other things, is the first time the CFPB has used its authority to prevent unfair, deceptive or abusive acts or practices ("UDAAP") as a basis for rulemaking. Although it has been characterized as a "payday loan" rule, as discussed more fully below, the Proposal would apply across the short-term consumer lending industry, including payday loans, auto title loans, deposit advance products and certain "high-cost" installment loans and open-end loans. It also would apply to "lenders" – bank, non-bank, and marketplace alike – that make "covered" loans for personal family or household purposes.
The Proposal has four major components:
- Requiring covered lenders to determine if a borrower is able to afford certain loans without resorting to repeat borrowing (the "Full Payment Test");
- Permitting covered lenders to forego a Full Payment Test analysis if they offer loans with specific structural features, such as an alternative "principal payoff option" for loans with a term under 45 days or two other alternative options for longer-term loans;
- Requiring notice to borrowers prior to debiting a consumer bank account and restricting repeat debit attempts; and
- Requiring covered lenders to make use of and report to credit reporting systems.
Comments on the Proposal are due by September 14, 2016. Given its potential impact, the Proposal is expected to provoke substantial industry comment. The CFPB's likely timetable for finalizing any rule as well as delay that might arise given the potential for continued political efforts focused on this rulemaking suggest that any final rule would not take effect for some time, perhaps in 2019, at the earliest.
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 - Prior to issuing the Proposal, in March 2015, the CFPB released a preliminary framework for payday lending for purposes of convening a panel of small entity representatives to solicit information on the impact the rule would have on small businesses and to recommend regulatory alternatives pursuant to the Small Business Regulatory Enforcement Fairness Act of 1996 ("SBREFA"). The SBREFA panel met in April 2016 and the CFPB's June 2015 report detailed the panel’s recommendations to the preliminary framework. Although the Proposal has retained some features of the CFPB's SBREFA outline, it differs in material respects. For instance, the Proposal does not contain an alternative that would have permitted lenders to make loans less than 5% of a borrower's gross monthly income without undertaking a Full Payment Test. It also contains a more detailed definition of "all-in" APR. The CFPB has not offered any reasons for the modifications and it is not clear what prompted the changes.
 - In previous substantive rulemakings, the CFPB has generally spent over a year reviewing comments and finalizing a rule. For example, the comment period for the Prepaid Accounts under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z) Proposed Rule closed on March 23, 2015 and, to date, the CFPB has not finalized the rule. Under a similar timeframe, a final rule in this space would not be published until 2018. According to the Proposal, a final rule would become effective 15 months after its publication in the Federal Register. This brings us to an effective date in 2019.
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