CFPB To Consider Rules Restricting Certain Payday, Deposit Advance, Vehicle Title and Other Short-Term Lending: CFPB Proposal Would Require Lenders To Assess Customers’ Ability To Repay, Impose Cooling-Off Periods for Consecutive Loans, and Require Disclosures and Limits on Repayment Through Customer Accounts

Sullivan & Cromwell LLP - March 30, 2015

On March 26, 2015, the Consumer Financial Protection Bureau (the “CFPB” or the “Bureau”) announced that it will be considering rules imposing significant structural limitations and other requirements on payday and similar loans:  (1) short-term (45 days or less) loans to consumers; and (2) longer-term (more than 45 days) high-interest rate personal loans (more than 36% measured by an “all in” annual percentage rate (APR) that is more inclusive than the Truth in Lending Act APR) where a lender has the right to collect from the customer’s paycheck or bank account, or where a non-purchase money loan is secured by the customer’s vehicle.  This proposal would also require advance notice to borrowers prior to collecting repayment of these types of loans through borrower bank or credit union accounts, and would limit unsuccessful withdrawal attempts from borrowers’ accounts without additional authorization.  According to the CFPB, this proposal would “end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans” and “restrict lenders from attempting to collect payment from consumers’ bank accounts in ways that tend to rack up excessive fees.”   In written prepared remarks on the announcement, CFPB Director Richard Cordray stated that “the proposed framework under consideration for this segment of the market is designed to achieve one crucial objective: to allow for responsible lending while ensuring that short-term loans do not turn into long-term cycles of debt.”   The CFPB proposals announced on March 26 would not restrict banks or credit unions from charging account overdraft fees, another area of CFPB scrutiny and potential rulemaking, but would cover deposit-advance products that banks have offered.

The proposal would substantially change the payday and similar small dollar lending markets, and likely lead to a significant reduction in overall lending activity for many of these products as they are currently offered.