January 3, 2018
The Consumer Financial Protection Bureau (the “CFPB” or the “Bureau”) released their Payday, Vehicle Title and Certain High Cost Installment Loans Rule (the “Final Rule”) on October 5, 2017. While the Final Rule is primarily aimed at the payday and vehicle title loan industry, it will also impact traditional installment lenders who make loans with a finance charge in excess of thirty-six percent (36%) that use a “leveraged payment mechanism” (“LPM”). This Client Alert will provide a brief summary of the Final Rule's key provisions, including:
I. Scope and Key Definitions
II. Requirements For Lenders Making Covered Loans
III. Safe Harbor For Qualifying Covered Loans
V. Recordkeeping, Reporting And General Compliance Burdens
The Final Rule adds 12 CFR part 1041 to Chapter X in Title 12 of the Code of Federal Regulations, effectively eliminating the payday lending industry as it currently exists by subjecting all loans with a term of less than forty-five (45) days (a “Covered Short-Term Loan”), to a detailed underwriting standard, restrictions on the use of LPM ‘s, added consumer disclosures, and significant reporting requirements exposing short term lenders to unprecedented regulatory scrutiny. Violations of the new underwriting and LPM standards are considered unfair and abusive practices under the Consumer Financial Protection Act (the “CFPA”). It is anticipated the payday lending industry will have no choice but to transition its business model to appear more like that of higher rate installment lenders in response.
The Final Rule makes it an abusive and unfair practice for a lender to:
For traditional installment lenders, the Final Rule represents a marked improvement from the Proposed Rule by limiting its scope to apply only to loans with a “cost of credit” calculated in compliance with Regulation Z that also use a LPM. The use of this “traditional” APR definition linked to the often used 36% trigger rate, especially when coupled with the requirement that a LPM be used, is expected to see the traditional installment lending industry continue with minimal disruption; however, the CFPB indicated in the Final Rule that they will consider the applicability of the more encompassing Military Lending Act definition of cost of credit to longer-term loans in a subsequent rule.
I. Scope and Key Definitions
If your institution offers a consumer loan that meets the definitional standards discussed below, regardless of the state usury laws in your state, you will be required to comply with the added requirements for a Covered Loan. There are limited exclusions from the scope of the Final Rule for the following types of loans:
B. Key Definitions
Covered Loan - is a closed-end or open-end loan extended to a consumer primarily for personal, family, or household purposes, that is not considered exempt. There are three categories of Covered Loans:
Covered Short-Term Loans (traditional payday loans) - loans with a duration of forty-five (45) days or less.
Covered Longer-Term Balloon Payment Loans – loans where the consumer is required to repay substantially the entire balance of the loan in a single payment, or to repay the loan though at least one payment that is more than twice as large as any other payment, more than 45 days after consummation.
Covered Longer-Term Loans - loans with a duration of more than forty-five (45) days extended to a consumer primarily for personal, family or household purposes if the “cost of credit” exceeds thirty-six percent (36%) per annum and the creditor obtains a “leveraged payment mechanism.”
Leveraged Payment Mechanism - The Final Rule defines a Leveraged Payment Mechanism as the right to initiate a transfer of money, through any means, from a consumer’s account to satisfy an obligation on a loan, except when initiating a single immediate payment transfer at the consumer’s request.
II. Requirements for Lenders Making Covered Loans
A. Underwriting Requirements
The Final Rule generally provides that it is an unfair and abusive practice for a lender to make a covered short-term loan or covered longer-term balloon-payment loan, or increase the credit available under a covered short-term loan or covered longer-term balloon payment loan, unless the lender first makes a reasonable determination that the consumer will have the ability to repay the loan according to its terms.
The Final Rule provides that a lenders determination that a consumer can repay a covered short-term loan or a covered longer-term balloon loan is reasonable only if either:
There is a limited exemption for certain covered short-term loans from the ability to repay and unfair and abusive practice provisions of the Final Rule for short term loans with the following features:
For covered short-term loans meeting these standards, the lender must also review the consumer’s borrowing history in its own records, the records of the lender’s affiliates, and a consumer report from an “information system” that has been registered with the CFPB for at least 180 days.
Prior to making a covered short-term loan under this section, the lender must also determine that the following requirements are satisfied:
Additional restrictions apply to covered short-term loans made under this conditional exemption, including additional disclosure requirements, and a prohibition against the lender or its affiliate making another covered short-term loan, or a non-covered loan to the same consumer while the first conditionally exempt loan is outstanding, or for a period of thirty days thereafter.
The Final Rule provides that it is an unfair and abusive practice for a lender to make attempts to withdraw payment from consumers’ accounts in connection with a covered loan after the lender’s second consecutive attempt to withdraw payments from the accounts from which the prior attempts were made have failed due to a lack of sufficient funds, unless the lender obtains the consumers’ new and specific authorization to make further withdrawals from the accounts. A “payment transfer” is defined broadly to include any lender-initiated debit or withdrawal of funds from a consumer’s account for the purpose of collecting any amount due or purported to be due in connection with a covered loan.
After a lender has initiated two consecutive failed payment transfers from a consumer’s account, the Final Rule requires them to provide a “Consumer Rights Notice” that is substantially similar to a model disclosure form contained in Appendix A to the Final Rule, no later than three business days after it receives information that the second consecutive attempt has failed.
There are limited exceptions to this restriction in cases of a single immediate payment transfer made at the consumers request in accordance with the Final Rule, or if the lender follows a detailed consumer approval process in accordance with the Final Rule that specifies the date, amount and payment channel of every additional payment transfer approved by the consumer.
The limitations placed on payment transfers, coupled with the threat of regulatory enforcement action based on allegations of unfair or abusive practices, will likely force those lenders willing to make a covered loan away from the use of a Leveraged Payment Mechanism.
C. Information Furnishing, Recordkeeping, Anti-Evasion, and Severability
The Final Rule requires all lenders who make a covered-short term loan and covered longer-term balloon loan to furnish extensive “loan information” to an “information system” that is registered with the Bureau. While the payday lending industry is familiar with loan level reporting on an isolated state by state basis, the accumulation of loan level data in a national database is troubling. Among the information required to be reported to the information systems will be:
The Final Rule was published in the Federal Register on November 17, 2017, and is effective as of January 16, 2018; however, compliance with the substantive provisions of the Final Rule will not be required until the “Compliance Date” of August 19, 2019. Members of the Krieg DeVault Financial Institutions practice are monitoring further developments in the short term consumer lending industry, and able to assist with any questions you may have with respect to how the Final Rule may impact your institution.
 12 U.S.C. § 5531
 For closed-end credit that does not provide for multiple advances to consumers, the consumer is required to repay substantially the entire amount of the loan within 45 days of consummation, or for all other loans, the
consumer is required to repay substantially the entire amount of the advance within 45 days of the advance under the loan
 For closed-end credit that does not provide for multiple advances to consumers, the consumer is not required to repay substantially the entire amount of the loan within 45 days of consummation, or for all other loans, the consumer is not required to repay substantially the entire amount of the loan within 45 days of an advance under the loan.
 12 C.F.R. §§ 1041.4 and 1041.5
 12 C.F.R. § 1041.5(a) (1) Basic living expenses means expenditures, other than payments for major financial obligations, that a consumer makes for goods and services that are necessary to maintain the consumer’s health, welfare, and ability to produce income, and the health and welfare of the members of the consumer’s household who are financially dependent on the consumer.
 12 C.F.R. § 1041.5(a) (3) Major financial obligations means a consumer’s housing expense, required payments under debt obligations (including, without limitation, outstanding covered loans), child support obligations, and alimony obligations.
 12 C.F.R. § 1041.5(a) (8) Residual income means the sum of net income that the lender projects the consumer will receive during the relevant monthly period, minus the sum of the amounts that the lender projects will be payable by the consumer for major financial obligations during the relevant monthly period and payments under the covered short-term loan or covered longer-term balloon payment loan during the relevant monthly period, all of which projected amounts are determined in accordance with paragraph (c).
 12 C.F.R. § 1041.6
 12 C.F.R. § 1041.7
 12 C.F.R. § 1041.8(a)(1)
 12 C.F.R. § 1041.9(c)
 12 C.F.R. § 1041.8(c)
 12 C.F.R. § 1041.10
 Sections 1041.2 through 1041.10, 1041.12, and 1041.13 have a compliance date of August 19, 2019.