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The Consumer Financial Protection Bureau (CFPB) issued a final rule in the Federal Register on November 17, 2017, that impacts payday and short-term loans as well as longer-term loans with balloon payments. The final rule will become effective January 16, 2018, 60 days after publication of the final rule in the Federal Register. However, compliance with most sections including 12 CFR 1041.2 through 1041.10, 1041.12, and 1041.13 will not be required until August 19, 2019, 21 months after publication of the final rule in the Federal Register. 

The rule applies to two types of covered loans:

• Category 1 – Consumer loans that have terms of 45 days or less and longer-term consumer loans with terms of more than 45 days that have only a single payment or that have a balloon payment.
• Category 2 – Subject only to the requirements concerning payment withdrawal practices, related disclosures, and recordkeeping. These are subject to the rule when the APR exceeds 36% and the lender may initiate payments from the consumer’s account without further action by the consumer.

Both category 1 and category 2 include open-end as well as closed-end consumer loans.

There are certain types of consumer loans that are excluded or exempted from the final rule including: (1) loans extended solely to finance the purchase of a good in which the good secures the loan; (2) home mortgages and other loans secured by real property or a dwelling if recorded or perfected; (3) credit cards; (4) student loans; (5) nonrecourse pawn loans; 
(6) overdraft services and lines of credit; (7) wage advance programs; (8) no-cost advances; 
(9) alternative loans (similar to loans made under the Payday Alternative Loan program administered by the National Credit Union Administration); and (10) accommodation loans.

All lenders who regularly extend credit are subject to the CFPB’s final rule including banks, credit unions, non-banks, and their service providers; however, most small community financial institutions do not have a payday loan product and may have state usury laws for non-payday loans that would prevent them from originating loans with a 36 percent annual percentage rate. Therefore, we think most small community financial institutions would not have loans that fall into category 2.  

Depending on the number and type of loans made within category 1, many lenders will be exempt due to the exclusion provided for “accommodation loans.” Accommodation loan means a covered loan where at the time that the loan is consummated, the lender and its affiliates collectively have made 2,500 or fewer covered loans in the current calendar year, and made 2,500 or fewer such covered loans in the preceding calendar year; and during the most recent completed tax year in which the lender was in operation, if applicable, the lender and any affiliates that were in operation and used the same tax year derived no more than 10 percent of their receipts from covered loans. Most covered loans and the receipts from those loans would count toward these thresholds, but accommodation loans are not counted for the threshold. 

The final rule mentions that the CFPB believes that depository institutions and credit unions with less than 10 billion dollars in assets rarely originate loans that are covered by this rule and for those that do make these loans, many of those loans would be exempted as accommodation or NCUA alternative loans. 

So if you think you may be making covered loans that are not exempted or excluded, here are some things you’ll need to know.  

It is considered an unfair and abusive practice for a lender to make covered short-term or longer-term balloon-payment loans without reasonably determining that the consumers can repay the loan within the set loan terms. The new ability-to-repay rules included in the final rule apply only to loans meeting Category 1.

Before making such a loan, the lender must determine that the consumer would be able to make the payments on the loan and still meet the consumer’s basic living expenses and other major financial obligations without needing to re-borrow over the ensuing 30 days. The lender is required to verify net monthly income and monthly debt obligations; verify the consumer’s monthly housing costs if a national consumer report is available or rely on the consumer’s written statement of monthly housing expenses if no such report is available; forecast a reasonable amount for basic living expenses, other than debt obligations and housing costs; and determine the consumer’s ability to repay the loan based on the lender’s projections of the consumer’s residual income or debt-to-income ratio.  

When determining the consumer’s ability to repay the loan, a lender is required to obtain and use a consumer report from credit reporting systems that are registered with the Bureau.

There is a “cooling-off period” of 30 days in which a lender is prohibited from making a covered short-term loan to a consumer who has already taken out three covered short-term or longer-term balloon-payment loans within 30 days of each other. The 30-day cooling-off period covers the 30 days after the third loan is no longer outstanding.

There are also new payment practices rules where it is considered an unfair and abusive practice for a lender to make attempts to withdraw payment from a consumer’s accounts to make payment on a covered loan in category 1 or 2 if the first and second consecutive attempts to withdraw the payment from the account had failed due to a lack of sufficient funds, unless the lender were to obtain the consumers’ new and specific authorization to make any further withdrawals from the deposit account. In addition, a written notice is required to be provided before the lender first attempts to withdraw payment for a covered loan from a consumer’s checking, savings, or prepaid account or before an attempt to withdraw such payment in a different amount than the regularly scheduled payment amount, on a date other than the regularly scheduled payment date, by a different payment channel than the prior payment, or to reinitiate a returned prior transfer. The notice must contain key information about the upcoming payment attempt and, if applicable, alert the consumer to unusual payment attempts.

Finally, a lender is required to develop and follow written policies and procedures that are reasonably designed to ensure compliance with the requirements in the final rule.

Postscript: On December 1, 2017, a group of House Republicans and Democrats introduced legislation to nullify the rule. The legislation used Congressional Review Act authority to repeal the rule and prevent the Bureau from issuing a similar rule in the future. The bill was sponsored by Rep. Dennis Ross (R-FL) and co-sponsored by Reps. Alcee Hastings (D-FL), Tom Graves (R-GA), Henry Cueller (D-TX), Steve Stivers (R-OH), and Collin Peterson (D-MN). Stay tuned for further updates. In the meantime, continue planning for implementation.