On October 5, 2017, the CFPB issued its final rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans, 12 C.F.R. pt. 1041. For certain short-term and balloon loans, the rule requires lenders to determine that borrowers are able repay the loans and limits loan refinancing. The rule also limits a lender’s ability to repeatedly cash a check or debit a consumer’s account after two unsuccessful attempts. This debit limit applies not only to all short-term and balloon loans, but to longer-term installment loans and lines of credit with an APR under the Truth in Lending Act that exceeds 36%.
The notice of the final rule is 1690 pages long, although it will later be found in the Federal Register with a more condensed format. Most of the notice is an explanation, review of the comments received, and analysis of the expected impact. The rule itself is found starting on page 1503 of the notice, and the Official Interpretations begin on page 1570.
This article summarizes the rule’s coverage, the rule’s two main provisions, and describes the rule’s effective date. The article then turns to a listing of ways under current law to challenge abusive payday, auto title, and installment loans.
The Rule’s Core Ability-to-Pay Rule Applies to Short-Term and Balloon Loans; Repeat Debit Protections Are Broader
The rule’s ability-to-pay provision applies to any loan that must be repaid within forty-five days of an advance, such as payday loans, auto title loans, and “deposit advance” payday loans offered by banks. It also applies to balloon loans—any loan where one payment is more than twice as large as any other payment—without regard to the length of the repayment period. The rule thus sweeps in long-term installment loans if they have large balloon payments. See 12 C.F.R. § 1041.3(b) (at p.1509).
The ability-to-repay provisions do not apply to high-cost installment loans without a large balloon payment, as the proposed rule would have. Rather, the Bureau has stated that it will address harms and risks associated with those loans through a future rulemaking, and in the meantime, scrutinize them using its supervision and enforcement authority.
The rule’s provision limiting repeat attempts to cash the borrower’s check or debit the borrower’s bank account applies to these same short-term loans and balloon loans, and that provision also applies to any loan with an APR under the Truth in Lending Act over 36%. See 12 C.F.R. § 1041.3(b)(iii) (at p.1510).
There are significant exclusions from the rule’s scope. It does not apply to loans secured by a dwelling, purchase money loans, credit cards extensions, private education loans, non-recourse pawn loans, or overdraft lines of credit. 12 C.F.R. § 1041.3(d) (at p.1511). Lenders who make no more than 2500 covered loans per year and derive no more than 10% of their revenues from such loans are also exempt. Certain loans with terms like the payday alternative loans currently made by many credit unions are also excluded. 12 C.F.R. § 1041.3(e) (at p.1512).
The Rule’s Ability-to-Repay Standard
The rule’s centerpiece is its ability-to-repay (ATR) standard. With certain exceptions, discussed below, the lender is required to make a reasonable determination, for covered loans, as to whether the specific borrower can repay the loan obligation and still meet basic living expenses and other financial obligations during the loan and for thirty days thereafter. The lender generally must verify income and major financial obligations and estimate living expenses. The rule also caps at three the number times a short-term loan can be rolled over into another short-term loan. 12 C.F.R. §§ 1041.4, 1041.5 (at p.1515).
Exception for Principal Reduction Loans
Lenders that do not wish to conduct an ability-to-pay analysis can instead make a limited number of loans if the loans step down in size under the principal payoff rules. 12 C.F.R. § 1041.6 (at p.1523). Any such loan that is made within thirty days of another loan must be smaller than the previous loan by an amount equal to one-third of the principal of the first loan in the sequence (for example, sequential loan principal amounts may be $450, $300, and $150). After the third loan, no additional loans may be made for at least thirty days. This type of loan may not be made if it would put the borrower’s total days’ indebtedness in all short-term covered loans (ATR loans and exception loans) at more than ninety days over a rolling twelve-month period.
The option of avoiding an ability-to-repay analysis is only available for loans that are closed-end, are no more than $500, and are not secured by a vehicle title. The consumer may not have recent (within the previous thirty days) or outstanding short-term or balloon-payment loans.
Limits on Repeated Attempts to Cash Checks or to Debit Consumer’s Account
The rule’s other major provision applies where the lender takes a post-dated check or has the right to debit a consumer’s bank or prepaid account. 12 C.F.R. § 1041.8 (at p.1528). (But the provision does not apply to a single immediate payment transfer made at the consumer’s request.) After two consecutive checks bounce or debit transfers fail, the lender must first obtain the consumer’s authorization to reattempt payment from the account.
This prohibition applies to future payments that come due on the loan, not merely the payment that failed. After two failed attempts, if the consumer authorizes only a single immediate payment transfer and not future transfers, future transfers remain prohibited regardless whether the single immediate transfer succeeds or fails. 12 C.F.R. pt. 1041, supp. I, § 1041.8(b)(2)(ii) cmt. 3 (at p.1654).
There are also notice requirements before a lender can initiate a transfer at an irregular interval or for an irregular amount.
When the Rule Becomes Effective
The rule becomes effective twenty-one months after it is published in the Federal Register. The earliest the rule could be effective is July 2019. Congress may also seek to rescind the rule under the Congressional Review Act and of course the rule may face a legal challenge.
Other Challenges to High-Rate Small Loans
While the CFPB addresses several abuses associated with high-rate small loans, its earliest effective date is July 2019. There are other already applicable bases to challenge abusive high-rate small loans, analyzed in detail in NCLC’s Consumer Credit Regulation. Of special note are the following ways to challenge payday loans, auto title loans, and installment loans, each listed with live links to the applicable section in Consumer Credit Regulation.
Regulation of Payday Loans and Attempts to Evade That Regulation
• Many states prohibit payday loans, cap their rates, or limit them in other ways. Violations of these laws may make the loan void or voidable, § 9.3.1. A state-by-state summary of payday lending regulation is found at § 9.3.
• Tribal payday loans present complicated issues, including those involving sovereign immunity, but state laws do apply to loans made off reservation and courts are increasingly rejecting rent-a-tribe models, § 9.6.3.
• Courts often reject payday lenders’ attempts to avoid a state’s restrictions by claiming that another state’s law applies, § 9.6.2, by structuring the loan as spurious open-end credit, § 9.6.4, by characterizing themselves as loan brokers, § 9.6.5, or through other imaginative tactics, § 9.6.5.
• Consumers may be able to revoke the payday lender’s authorization to debit the account or stop payment on a check or EFT, § 9.2.8, or close a bank account, § 9.2.9.
• Payday lenders may be subject to significant statutory damages for violation of the Electronic Fund Transfers Act, particularly where an Internet payday lender requires consumers to make more than one payment by EFT, § 9.2.1.
• Payday lending to service members or their dependents is likely to violate the federal Talent-Nelson Military Lending Act, § 9.4.1.
• Payday lenders must comply with Truth in Lending Act disclosure requirements, § 9.4.3.
• State UDAP and unconscionability claims against payday lenders may be available, § 9.7.
• Criminal or civil bounced check statutes often have limited applicability when a consumer bounces a payment to a payday lender, § 9.2.3. A lender threatening to or using these statutes may be in violation of state law and a third-party collector may be violating the Fair Debt Collection Practices Act.
• While a bank may not be liable where a payday lender deposits a post-dated check early, the lender may be liable for state UDAP or breach of contract claims, § 9.2.5.
• A consumer’s leverage with a payday lender may also improve by filing for bankruptcy, § 9.9.
Representing Clients with Auto Title Loans
• Over half the states have special auto title loan laws or regulations. Many of these were adopted to legitimize these abusive loans, but even those laws have provisions that title lenders often violate. See § 12.5.5 for a state-by-state summary.
• Courts often reject attempts to disguise auto title loans as leasebacks or buybacks or in other ways to avoid applicable state law. See §§ 12.2, 12.4.
• Most states hold that, since title lenders do not take possession of the borrower’s car, they are not true pawns and the lender cannot hide behind state pawnshop laws. See § 12.3.
• Actual and statutory damages under the UCC and tort claims such as conversion may be available if the lender does not have a valid security interest or has not followed UCC procedures to repossess and dispose of the vehicle upon default, as briefly summarized at § 12.5.3 and more thoroughly analyzed at NCLC’s Repossessions.
• The federal Talent-Nelson Military Lending Act prohibits auto title loans to servicemembers or their dependents. See § 12.6.
What You Need to Know About Installment Loans
Closed-end, non-bank installment loans unrelated to a specific purchase were widespread thirty or more years ago, then went out favor, but are now making a comeback as lenders seek to avoid restrictions on payday loans. Faced with their growing prevalence, practitioners must be familiar with the following:
• Existing (and often quite old) state regulation for the relevant jurisdiction, as summarized at Appx. D.
• Licensure requirements in almost all states for non-bank installment lenders. Many states provide that the loan is void if the lender is not licensed. § 10.8.
• State rate caps. Most states cap interest rates and all or most fees for installment loans. Calculation complexities are explained in Ch. 5 and § 10.2.
• Special rules for installment loans to servicemembers or their dependents under the federal Talent-Nelson Military Lending Act, which imposes a strict 36% interest rate cap and other limitations. § 10.2.7.
• The limits of federal rate exportation and other forms of federal preemption, which generally do not apply to installment loans originated by lenders other than banks. § 10.1.5.
• Restrictions on add-ons and excessively priced credit insurance. § 10.3.
• State law limits on payment schedules, the loan term, rebate policies, late fees, post-maturity interest rates, and collateral. §§ 10.4, 10.6, 10.7.
Watch out for attempts to evade state closed-end credit regulation by spuriously casting the loans as open-end. § 10.9. State open-end credit statutes are summarized at Appx. E.
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