The Consumer Financial Protection Bureau has finalized its payday lending rule, creating “strong, common-sense protections” to prevent “financially vulnerable consumers” from falling into “payday debt traps,” the bureau said.
The rule requires payday lenders to determine upfront whether or not the consumer is capable of repaying the loan. The rule also curtails lenders’ repeated attempts to debit payments from a borrower’s bank account, “a practice that racks up fees and can lead to account closure,” the bureau said.
Many borrowers end up repeatedly rolling over or refinancing their loans, each time accumulating new charges. More than four out of five payday loans are re-borrowed within a month, usually right when the loan is due or shortly thereafter, the CFPB said.
The rule applies to loans that require consumers to repay all or most of the debt at once. Under the new rule, lenders must conduct a “full-payment test” to determine upfront that borrowers can afford to repay their loans without re-borrowing. It also requires lenders to use credit reporting systems registered by the Bureau to report and obtain information on certain loans covered by the proposal.
For certain short-term loans, lenders can skip the full-payment test if they offer a “principal-payoff option” that allows borrowers to pay off the debt more gradually. The rule allows less risky loan options, including certain loans typically offered by community banks and credit unions, to forgo the full-payment test.
The new rule also includes a “debit attempt cutoff” for any short-term loan, balloon-payment loan or longer-term loan with an annual percentage rate higher than 36 percent that includes authorization for the lender to access the borrower’s checking or prepaid account.
“Loans like these are heavily marketed to financially vulnerable consumers. Though they offer cash-strapped consumers access to credit, the full-payment requirement can make these loans unaffordable,” said CFPB Director Richard Cordray in a press call. “Ultimately, we believe this rule will allow for responsible lending while ensuring that people are not saddled with unaffordable loans that undermine their financial lives.”
The final rule does not apply ability-to-repay protections to all of the longer-term loans that would have been covered under the proposal. The CFPB is conducting further study to consider how the market for longer-term loans is evolving and the best ways to address concerns about existing and potential practices.