CFPB Issues Final Rule Rescinding Payday Loan Mandatory Underwriting Requirements
By Lawrence Kaplan, Sara Weed, Jason Cabral, Quinn Dang & Karin Thrasher*
The Consumer Financial Protection Bureau (the “CFPB” or “Bureau”) recently issued a final rule (the “Revocation Rule”)
A. Overview of the 2017 Rule
The original scope of the 2017 Payday Lending Rule
collections requirements (also known as the Payments provisions); and
The underwriting standards in the 2017 Rule were intended to require lenders of covered loans
The 2017 Rule also placed restrictions on debt collection attempts, focusing on the initiation of direct withdrawals from consumers’ accounts (the “Payments Provisions”).
B. The Impact of the Revocation Rule
Although most of the provisions of the 2017 Rule originally had a compliance date of August 19, 2019, the 2017 Rule has been subject to a number of efforts to delay or roll back the requirements—starting in January 2018 when the Acting Director of the CFPB announced the Bureau’s intention to engage in rulemaking to reconsider the 2017 Rule. Then in June 2019, the CFPB issued a final rule to formally delay the August 2019 compliance date for the Mandatory Underwriting Provisions until November 2020.
The Revocation Rule formally revokes the following key provisions under the Mandatory Underwriting provisions:
The Identification Provision, eliminating the requirement that a lender must confirm a consumer has an ability-to-repayby examining a consumer’s basic living expenses, debt-to-income ratio, and major financial obligations;
The Prevention Provision, eliminating the requirement to verify a consumer’s income; and
The Recordkeeping and Furnishing Provisions specific to the Mandatory Underwriting Provisions.
The CFPB also clarifies that the Bureau will no longer deem the failure to determine a consumer’s ability to repay as an unfair and abusive practice. The 2017 Rule also authorized a Registered Information System, whereby lenders would register with the Bureau certain information concerning most loans covered under the 2017 Rule. The Revocation Rule removes this furnishing requirement; lenders will no longer be required to furnish information needed to uniquely identify the loan, specific information about the responsible consumer(s) for the loan, and the loan consummation date for all covered loans. To implement the Revocation Rule, the Bureau also removed certain model forms from its regulations.
Although the Revocation Rule significantly decreased the scope of the 2017 Rule, the Payments Provision of the 2017 Rule remains intact, continuing to make it an unfair and abusive practice for a lender to attempt to withdraw payment directly from consumers’ accounts after the lender’s second consecutive failed attempt. Moreover, the Revocation Rule retained the requirement for lenders to provide consumers with a written or electronic “payment notice” before making the first payment transfer, and a “consumer rights notice” after two consecutive failed withdrawal attempts. Finally, basic record retention remains in effect from the Mandatory Underwriting Provisions, as lenders must retain, or be able to reproduce an image of, the loan agreement for 36 months after the date on which a covered loan is satisfied. The requirement to retain records for 36 months extends to documentation of the leveraged payment mechanisms, authorization of additional payment transfer, and one-time electronic transfer authorizations. Additionally, the lender must retain electronic records of payments received and attempted payment transfers.
The Revocation Rule is effective 90 days after the date of publication in the Federal Register.
C. Implications for Lenders and Investors
While the purpose of the 2017 Rule, like the Bureau itself, was intended to address potential consumer harm, the Revocation Rule essentially maintains the status quo in the short-term lending industry, permitting the origination of payday loans without imposing additional obligations on industry participants such as to ensure that a consumer can repay or that extensive processes and procedures must be adopted and maintained to track such loans. For lenders and investors, maintaining the status quo should be viewed as bringing certainty to the market, as significant changes and expenses are no longer seen as potential risks on the horizon, particularly those costs associated with compliance with the 2017 Rule and potential penalties for violating the obligations initially imposed by the 2017 Rule.
As one of the Bureau’s original purposes was to address abuses in the payday industry, the Revocation Rule neuters attempts to limit payday loans to those consumers that can demonstrate ability to repay. The Revocation Rule will allow payday loans to persist in the market largely unchecked. We note that the Revocation Rule is protective of an industry that has long been viewed as one of the primary impetuses for the CFPB, and therefore the new rule could be viewed as antithetical to the mission of the CFPB. As a result, the industry should not be surprised if future Directors of the CFPB attempt to reinstate or otherwise reformulate the consumer protections that were the hallmark of the 2017 Rule. Thus, the adoption of the Revocation Rule may only provide temporary relief to the industry.
We note that the Revocation Rule also closely follows the May 2020 announcement by the federal financial institution regulatory agencies of principles for offering small-dollar loans in a responsible manner to meet financial institutions customers’ short-term credit needs in response to the ongoing COVID-19 pandemic, signifying a shift in the other federal financial regulatory agencies’ views on endorsing short-term, small-dollar loans to consumers.
Paul Hastings attorneys actively advise lenders, investors, and parties subject to the CFPB’s regulatory authority. Please contact us if you would like to discuss any of these issues in detail.
*Ms. Thrasher is a summer associate in the Washington, D.C. office.